Written by Steven Hansen
The ISM improved and remained in expansion whilst the Markit PMI declined but remained in expansion.
Analyst Opinion of the ISM and Markit Services Survey
I have a hard time believing services are in expansion with many restaurants, bars, and gyms running nowhere near full potential – and parts of the country have returned to lockdown.
From Econoday:
| Consensus Range | Consensus | Actual | |
| Markit Services | 55.5 to 55.7 | 55.7 | 54.8 |
| ISM Services | 54.3 to 55.7 | 54.5 | 57.2 |
From Markit:
Business activity growth slowest for three months amid rise in virus cases
- Output and new order growth ease from November’s peaks
- Cost burdens rise at survey-record pace
- Business expectations moderate amid pandemic uncertainty
- December PMI data signalled a slower expansion in business activity across the U.S. service sector. Although still solid, the upturn eased notably from November’s recent high, as new business growth softened amid increased virus cases. Additional restrictions also dampened foreign client demand which fell for the first time since May. Cost burdens continued to soar, as the rate of input price inflation picked up again to reach a series record high. Meanwhile, business confidence softened as the post-election surge in optimism dwindled and the coronavirus disease 2019 (COVID-19) pandemic worsened. The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 54.8 in December, down notably from 58.4 in November and also lower than the earlier released ‘flash’ estimate of 55.3. Although the rate of expansion was slightly stronger than the series average, it marked a significantly slower upturn in output, as a rise in virus cases dampened client demand.
- The latest increase in total new business was the slowest for four months. The loss of growth momentum reportedly stemmed from difficulties among consumer-facing firms following another surge in virus cases and additional social distancing restrictions. Alongside a slowdown in domestic demand growth, service sector firms registered the first contraction in new business from abroad since May. Panellists often stated that the fall in foreign client demand stemmed from greater travel restrictions imposed due to the ongoing pandemic. The rate of decline was solid overall, but was much softer than those seen in the spring at the start of the pandemic.
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From the ISM Services report:
Economic activity in the services sector grew in December for the seventh 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™ registered 57.2 percent, 1.3 percentage points higher than the November reading of 55.9 percent. This reading represents a seventh straight month of growth for the services sector, which has expanded for all but two of the last 131 months.
“The Supplier Deliveries Index registered 62.8 percent, up 5.8 percentage points from November’s reading of 57 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 Prices Index figure of 64.8 percent is 1.3 percentage points lower than the November reading of 66.1 percent, indicating that prices increased in December, and at a slower rate. According to the Services PMI™, 14 services industries reported growth. The composite index indicated growth for the seventh consecutive month after a two-month contraction in April and May. In December, a slight uptick in the rate of services-sector growth continued. Respondents’ comments are mixed about business conditions and the economy. Various local- and state-level COVID-19 shutdowns continue to negatively impact companies and industries. Applicable human resources, production capacity and logistics have been more constrained than during the previous month. Most respondents are cautiously optimistic about business conditions with the recent approval and impending distribution of vaccines,” says Nieves.
INDUSTRY PERFORMANCE
The 14 services industries reporting growth in December — listed in order — are: Management of Companies & Support Services; Wholesale Trade; Retail Trade; Health Care & Social Assistance; Transportation & Warehousing; Finance & Insurance; Utilities; Agriculture, Forestry, Fishing & Hunting; Information; Professional, Scientific & Technical Services; Mining; Public Administration; Construction; and Educational Services. The four industries reporting contraction in December are: Arts, Entertainment & Recreation; Accommodation & Food Services; Other Services; and Real Estate, Rental & Leasing.
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 improved 1.4 points and now is at 59.4
- The New Orders Index improved 1.3 points and is currently at 58.5
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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