January 2021 ISM and Markit Services Surveys Improved

Written by Steven Hansen

The ISM improved and remained in expansion whilst the Markit PMI improved and remained in expansion.

From Econoday:

From Markit:

Sharp upturn in business activity amid stronger client demand

• Output and new order growth regain momentum
• Fastest increase in cost burdens on record
• Slowest rise in employment since July 2020
• January PMITM data signalled a sharper expansion in business activity across the U.S. service sector. Excluding November’s recent high, the latest upturn was the fastest since March 2015, amid a stronger rise in new business. Foreign client demand also picked up, as new export orders returned to growth. Despite a notable improvement in business confidence, the rate of job creation eased as pressure on capacity dwindled and concerns regarding the short-term outlook remained. Meanwhile, cost burdens soared once again, with the rate of input price inflation the fastest since the survey began in 2009. Firms largely passed on higher costs to clients through a marked rise in charges.
• The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 58.3 in January, up from 54.8 in December and higher than the earlier released ‘flash’ estimate of 57.5. The rate of growth was the second-sharpest in almost six years, with firms linking the upturn to stronger client demand and an increase in new business. January data indicated a strong rise in new orders. Excluding November’s recent high, the pace of expansion was the fastest since February 2019 as sales growth regained momentum. The increase was often attributed to greater demand from new and existing clients. At the same time, foreign customer demand picked up, as new business from abroad returned to expansion. Although only marginal, the rate of growth was the fastest for three months.

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From the ISM Services report:

Economic activity in the services sector grew in January for the eighth 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 58.7 percent, 1 percentage point higher than the seasonally adjusted December reading of 57.7 percent. This reading is the highest since February 2019 (58.8 percent) and indicates the eighth straight month of growth for the services sector, which has expanded for all but two of the last 132 months.

“The Supplier Deliveries Index registered 57.8 percent, down 5 percentage points from December’s reading of 62.8 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 64.2 percent is 0.2 percentage point lower than the seasonally adjusted December reading of 64.4 percent, indicating that prices increased in January, and at a slower rate. According to the Services PMI®, 14 services industries reported growth. The composite index indicated growth for the eighth consecutive month after a two-month contraction in April and May. There was continued growth in the services sector for the month of January. Respondents’ comments are more optimistic about business conditions and the economy. Various local- and state-level COVID-19 restrictions continue to negatively impact companies and industries. Production capacity and logistics issues continue to cause supply chain challenges,” says Nieves.

INDUSTRY PERFORMANCE

The 14 services industries reporting growth in January — listed in order — are: Real Estate, Rental & Leasing; Construction; Wholesale Trade; Finance & Insurance; Transportation & Warehousing; Health Care & Social Assistance; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Other Services; Mining; Professional, Scientific & Technical Services; Public Administration; and Information. The four industries reporting contraction in January are: Arts, Entertainment & Recreation; Educational Services; Retail Trade; and Utilities.

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 0.6 points and now is at 59.9
• The New Orders Index improved 3.2 points and is currently at 61.8

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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