Written by Steven Hansen
The ISM declined but remained in expansion whilst the Markit PMI improved and remained in expansion.
Analyst Opinion of the ISM and Markit Services Survey
The ISM services survey is and the Markit Services index show similar modest growth. I have a hard time believing services are in expansion with many restaurants, bars, gyms, and even some schools closed.
From Econoday:
| Consensus Range | Consensus | Actual | |
| Markit Services | 55.0 | ||
| ISM Services | 54.8 to 57.9 | 57.0 | 56.9 |
From Markit:
Strongest expansion in business activity since March 2019
- Output growth quickens amid renewed upturn in new business
- Employment rises at the fastest pace since June 2014 as backlogs of work show largest rise for over a decade
- Input cost pressures remain steep
- August PMITM data signalled a strong expansion in business activity across the U.S. service sector, as output rose at the sharpest rate for nearly one and a half years. The upturn was driven by greater client demand, as new orders grew at the quickest pace for over a year. As a result, firms increased their workforce numbers sharply to cope with greater pressure on capacity. Although business expectations ticked down slightly, firms remained optimistic on balance, with sentiment regarding the year ahead at its second-highest since April 2019. Meanwhile, input cost inflation eased slightly, though nonetheless remained sharp. Increased supplier prices, including for PPE, were partially passed on to clients through a second month of marked growth of charges.
- The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 55.0 in August, up notably from 50.0 in July and slightly higher than the earlier ‘flash’ estimate of 54.8. The latest expansion was strong overall and the quickest since March 2019. Firms often stated that the upturn in output was due to greater client demand and the further reopening of businesses. Contributing to the rise in business activity was a solid increase in new sales in August. Growth in new business was commonly attributed to rising client demand and increased marketing activity. The rate of expansion was the fastest since July 2019, with new export orders also rising, growing at the fastest pace on record (since September 2014).
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From the ISM Services report:
Economic activity in the services sector grew in August for the third month in a row, say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business®.
The report was issued today by Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee: “The Services PMI™ (formerly the Non-Manufacturing NMI®) registered 56.9 percent, 1.2 percentage points lower than the July reading of 58.1 percent. This reading represents growth in the services sector for the third straight month and the 125th time in the last 127 months, with the exception of April’s and May’s contraction.
“The Supplier Deliveries Index registered 60.5 percent, up 5.3 percentage points from July’s reading of 55.2 percent. Supplier Deliveries is the only ISM® Report On Business® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases. The higher readings for supplier deliveries in the four months prior to July were primarily a product of supply problems related to the coronavirus (COVID-19) pandemic. Supplier deliveries are now more closely correlating to current supply and demand.
“The Prices Index figure of 64.2 percent is 6.6 percentage points higher than the July reading of 57.6 percent, indicating that prices increased in August at a faster rate. According to the Services PMI™, 15 services industries reported growth. The composite index indicated growth for the third consecutive month after contraction in April and May. The sector’s previous period of contraction was in November and December 2009, with Services PMI™ readings of 49.5 percent and 49.7 percent, respectively. Respondents’ comments are mostly optimistic and industry specific about business conditions and the economy as businesses are starting to reopen. Industries that have not reopened remain concerned about the ongoing uncertainty. There is a challenge with capacity and logistics due to the pandemic and the impact on deliveries and order fulfillment,” says Nieves.
INDUSTRY PERFORMANCE
The 15 services industries reporting growth in August — listed in order — are: Arts, Entertainment & Recreation; Health Care & Social Assistance; Utilities; Accommodation & Food Services; Transportation & Warehousing; Wholesale Trade; Construction; Retail Trade; Management of Companies & Support Services; Public Administration; Finance & Insurance; Educational Services; Agriculture, Forestry, Fishing & Hunting; Real Estate, Rental & Leasing; and Professional, Scientific & Technical Services. The three industries reporting a decrease in August are: Mining; Information; and Other Services.
ISM Services Index
source: tradingeconomics.com
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There are two sub-indexes in the ISM Services which have good correlations to the economy – the Business Activity Index and the New Orders Index – both have good track records in spotting an incipient recession.
This index and its associated sub-indices are fairly volatile.
- The Business Activity sub-index declined 4.8 points and now is at 62.4
- The New Orders Index declined 10.9 points and is currently at 56.8
The complete ISM manufacturing and non-manufacturing survey table are below.
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Econintersect does give serious consideration to this survey as the service sector accounts for 80% of the economy and 90% of employment. However, this an opinion survey and is not hard data.
Caveats on the use of the ISM Non-Manufacturing Index:
This is a survey, a quantification of opinion. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy for as long as it has been in existence. Surveys lead hard data by weeks to months and can provide early insight into changing conditions.
The main ISM non-manufacturing index (NMI) is so new that it does not have enough data history to have reliable certainty about how it correlates to the economy. Again, two sub-indices (business activity and new orders) do have a good correlation for the limited history available.
No survey is accurate in projecting employment – and the ISM Non-Manufacturing Employment Index is no exception. Although there are some general correlation in trends if you stand far enough back from this graph, month-to-month movements have not correlated well with the BLS Service Sector Employment data.
From Econoday:
The ISM non-manufacturing survey does not compile a composite index like its manufacturing cousin. The business activity index, which is actually akin to the production index in the manufacturing survey, is widely followed as the key figure from this survey.
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