Written by Steven Hansen
The ISM declined but remained strongly in expansion whilst the Markit PMI also declined but remains strongly in 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 | 64.8 to 70.2 | 64.9 | 64.6 |
| ISM Services | 62.0 to 64.3 | 63.5 | 60.1 |
From Markit:
Strong business activity growth rounds off best quarter in PMI survey history
- Expansions in output and new orders ease but remain robust
- Further substantial increases in cost burdens
- Pressure on capacity builds amid hiring difficulties
- June PMI™ data indicated a further marked upturn in business activity across the U.S. service sector, supported by a substantial rise in client demand. Business confidence in the outlook also improved to the second-highest in seven years. Rates of output and new order growth eased from May’s record highs, however, and capacity constraints meant backlogs of work grew at the quickest rate for ten months. Although firms continued to hire new workers, challenges finding suitable candidates weighed on the pace of job creation. Meanwhile, input prices increased at the second-fastest rate on record as supplier price hikes and greater wage bills pushed up cost burdens. Nonetheless, accommodative demand conditions allowed firms to partially pass on higher costs to clients.
- The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 64.6 in June, down from 70.4 in May and slightly below the earlier released ‘flash’ estimate of 64.8. The latest expansion in output was the third-fastest since data collection began in October 2009, only slower than recent upturns in May and April, respectively. Contributing to the robust rise in activity across the service sector was a further marked increase in new business at the end of the second quarter. Alongside strong customer demand, firms attributed the upturn in new sales to the acquisition of new clients. Although the rate of new business growth slipped to a three-month low, it was still the third-fastest on record. Mirroring the trend for total sales, new export orders rose at a strong pace that was only slightly slower than May’s recent peak and among the steepest in the history of the survey. The fourth successive monthly expansion in foreign client demand was Expansions in output and new orders ease but remain robust Further substantial increases in cost burdens Pressure on capacity builds amid hiring difficulties Including IHS Markit U.S. Composite PMI™ linked by companies to the relaxation of COVID-19 restrictions in key export markets.
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From the ISM Services report:
Economic activity in the services sector grew in June for the 13th 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 60.1 percent, which is 3.9 percentage points lower than May’s all-time high reading of 64 percent. The June reading indicates the 13th straight month of growth for the services sector, which has expanded for all but two of the last 137 months.
“The Supplier Deliveries Index registered 68.5 percent, down 1.9 percentage points from May’s reading of 70.4 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 79.5 percent, 1.1 percentage points lower than the May reading of 80.6 percent, indicating that prices increased in June, and at a slightly slower rate.
“According to the Services PMI®, 16 services industries reported growth. The composite index indicated growth for the 13th consecutive month after a two-month contraction in April and May 2020. The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all-time high. Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions,” says Nieves.
INDUSTRY PERFORMANCE
The 16 services industries reporting growth in June — listed in order — are: Arts, Entertainment & Recreation; Other Services; Transportation & Warehousing; Wholesale Trade; Retail Trade; Management of Companies & Support Services; Accommodation & Food Services; Utilities; Mining; Construction; Health Care & Social Assistance; Public Administration; Information; Finance & Insurance; Educational Services; and Professional, Scientific & Technical Services. The two industries that reported a decrease in the month of June are Real Estate, Rental & Leasing; and 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 5.8 points and now is at 60.4
- The New Orders Index decreased 1.8 points and is currently at 62.1
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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