Written by Steven Hansen
The ISM improved and remained in expansion whilst the Markit PMI improved and now is at record highs.
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 | 62.9 to 70.1 | 67.4 | 70.4 |
| ISM Services | 61.5 to 64.5 | 63.1 | 62.7 |
From Markit:
Business activity growth rate accelerates to record high in May
- Stronger client demand spurs sharper output expansion
- Cost burdens rise at quickest pace on record
- Further steep increase in employment despite hiring
- May PMI™ data indicated the fastest rise in business activity since data collection for the series began in October 2009. The unprecedented expansion in output was supported by a marked increase in new business, in turn buoyed by the quickest rise in new export orders for nine months. Greater business requirements resulted in a further sharp rise in employment. That said, the pace of job creation softened as firms reported difficulties filling vacancies. Strain on capacity was also reflected in another monthly rise in backlogs of work. At the same time, the rate of input cost inflation accelerated to a series high amid ongoing supplier price hikes. In an effort to pass on greater costs, service providers raised their charges at an unprecedented pace.
- The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 70.4 in May, up from 64.7 in April and greater than the earlier released ‘flash’ estimate of 70.1. The upturn in output was the fastest on record, with the rate of expansion accelerating for the fifth month running. The increase in business activity was often linked to stronger client demand and a sustained rise in new orders. Firms also noted that the continued reopening of the economy following COVID-19 restrictions allowed for a greater range of services to be made available for customers. Driving the expansion in output was a quicker rise in new business across the service sector during May. The rate of growth was the fastest since data collection began in late-2009. The unprecedented increase in new orders was attributed to stronger business and consumer confidence, stemming from a successful vaccination programme and the reopening of the economy.
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From the ISM Services report:
Economic activity in the services sector grew in May for the 12th 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® reached another all-time high in May, registering 64 percent, which is 1.3 percentage points higher than April’s reading of 62.7 percent. The previous record high was 63.7 percent in March. The May reading indicates the 12th straight month of growth for the services sector, which has expanded for all but two of the last 136 months.
“The Supplier Deliveries Index registered 70.4 percent, up 4.3 percentage points from April’s reading of 66.1 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 registered 80.6 percent, which is 3.8 percentage points higher than the April reading of 76.8 percent, indicating that prices increased in May, and at a faster rate. The last time the Prices Index was this elevated was when it registered 77.4 percent in July 2008; the all-time high is 83.5 percent in September 2005.
“According to the Services PMI®, all 18 services industries reported growth. The composite index indicated growth for the 12th consecutive month after a two-month contraction in April and May 2020. There was continued growth in the services sector in May. The rate of expansion is very strong, as businesses have reopened and production capacity has increased. However, some capacity constraints, material shortages, weather-related delays, and challenges in logistics and employment resources continue,” says Nieves.
INDUSTRY PERFORMANCE
The 18 services industries reporting growth in May — listed in order — are: Retail Trade; Wholesale Trade; Construction; Arts, Entertainment & Recreation; Transportation & Warehousing; Real Estate, Rental & Leasing; Mining; Finance & Insurance; Management of Companies & Support Services; Utilities; Other Services; Information; Accommodation & Food Services; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Public Administration; Professional, Scientific & Technical Services; and Educational 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 increased 3.5 points and now is at 66.2
- The New Orders Index increased 0.7 points and is currently at 63.9
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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