Written by Steven Hansen
The ISM declined but remained in expansion whilst the Markit PMI improved and advanced further into expansion.
Analyst Opinion of the ISM and Markit Services Survey
With the economy reopening, it comes as no surprise that both of these indices are well into expansion.
From Econoday:
Consensus Range | Consensus | Actual | |
Markit Services | 59.9 to 62.2 | 62.2 | 64.7 |
ISM Services | 63.0 to 65.0 | 64.2 | 62.7 |
From Markit:
Business activity expands at fastest pace on record amid marked uptick in client demand
- Most marked upturns in output and new orders on record
- Employment growth accelerates
- Cost pressures strongest on record
- April PMITM data indicated a marked and unprecedented expansion in business activity across the U.S. service sector. Supporting the upturn in output was the fastest increase in new business on record. Pressure on capacity remained evident, as backlogs of work accumulated at a faster pace and employment rose at the second-sharpest rate on record. Some concerns regarding the sustainability of new order inflows weighed slightly on business confidence, although optimism remained relatively strong. Meanwhile, input costs rose at the quickest rate since data collection began in October 2009 amid supplier price hikes. Firms partially passed on higher prices to their customers through the fastest rise in charges on record.
- The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 64.7 at the start of the second quarter, up from 60.4 in March and higher than the earlier released ‘flash’ figure of 63.1 to signal a marked increase in service sector business activity. The robust upturn in output was the sharpest since data collection began in late-2009. Many firms noted that the expansion was linked to stronger client demand and a rise in new sales. Some companies, however, stated that output has not yet recovered to pre-pandemic levels. New business increased at the most marked pace on record in April, with the rate of expansion accelerating for the fourth month running. The upturn was commonly attributed to the relaxation of lockdown measures and further reopening of businesses, with client demand expanding.
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From the ISM Services report:
Economic activity in the services sector grew in April for the 11th 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 62.7 percent, which is 1 percentage point lower than last month’s all-time high of 63.7 percent. The April reading indicates the 11th straight month of growth for the services sector, which has expanded for all but two of the last 135 months.
“The Supplier Deliveries Index registered 66.1 percent, up 5.1 percentage points from March’s reading of 61 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 76.8 percent is 2.8 percentage points higher than the March reading of 74 percent, indicating that prices increased in April, and at a faster rate. This is the index’s highest reading since it reached 77.4 percent in July 2008.
“According to the Services PMI®, 17 services industries reported growth. The composite index indicated growth for the 11th consecutive month after a two-month contraction in April and May 2020. There was slowing growth in the services sector in April; however, the rate of expansion is still strong. Respondents’ comments indicate that pent-up demand is continuing. Production-capacity constraints, material shortages, weather and challenges in logistics and human resources continue to affect deliveries, which has resulted in a reduction of inventories,” says Nieves.
INDUSTRY PERFORMANCE
The 17 services industries reporting growth in April — listed in order — are: Arts, Entertainment & Recreation; Wholesale Trade; Management of Companies & Support Services; Construction; Real Estate, Rental & Leasing; Utilities; Public Administration; Transportation & Warehousing; Retail Trade; Other Services; Finance & Insurance; Mining; Health Care & Social Assistance; Professional, Scientific & Technical Services; Educational Services; Information; and Accommodation & Food Services. The only industry reporting a decrease in April is Agriculture, Forestry, Fishing & Hunting.
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 decreased 6.7 points and now is at 62.7
- The New Orders Index decreased 4.0 points and is currently at 63.2
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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