Written by Steven Hansen
The ISM improved and remains strongly in expansion whilst the Markit PMI declined but but also 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 | 59.7 to 63.5 | 59.7 | 59.9 |
ISM Services | 58.0 to 62.3 | 60.4 | 64.1 |
From Markit:
Softest rise in business activity since February
- Further marked expansions in output and new business
- Joint-quickest rise in backlogs for almost a year
- Inflationary pressures ease but remain historically strong
- July PMI™ data indicated another robust expansion in U.S. service sector business activity. The upturn softened to the slowest since February, but was much quicker than the series average. Contributing to the less marked upturn in output was a softer rise in new business. Nonetheless, domestic and foreign client demand remained historically strong. In line with larger inflows of new business, backlogs of work rose solidly and at the joint-fastest pace since August 2020. Efforts to ease pressure on capacity was hampered by reports of a shortage of suitable candidates. Meanwhile, input costs and output charges rose substantially despite their respective rates of inflation softening again from May’s historic highs.
- The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 59.9 at the start of the third quarter, down from 64.6 in June. This was broadly in line with the earlier released ‘flash’ estimate of 59.8 in July. The latest upturn in business activity was marked overall, despite easing to a five-month low. Greater output was linked to strong demand conditions and a sustained increase in new orders. Some companies stated that capacity constraints hampered activity growth, however. New business continued to rise in July, and at one of the fastest rates since data collection began in October 2009. The upturn was supported by a pick-up in client demand following vaccinations and the relaxation of COVID-19 restrictions. The robust expansion was one of the quickest in over three years despite softening to the slowest since February.
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From the ISM Services report:
Economic activity in the services sector grew in July for the 14th 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 another all-time high of 64.1 percent, which is 4 percentage points higher than the June reading of 60.1 and eclipses the previous record of 64 percent in May 2021. The July reading indicates the 14th straight month of growth for the services sector, which has expanded for all but two of the last 138 months.
“The Supplier Deliveries Index registered 72 percent, up 3.5 percentage points from June’s reading of 68.5 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 82.3 percent, up 2.8 percentage points from the June figure of 79.5 percent and its second-highest reading ever, behind September 2005 (83.5 percent).
“According to the Services PMI®, 17 services industries reported growth. The composite index indicated growth for the 14th consecutive month after a two-month contraction in April and May 2020. The rate of expansion in the services sector recorded another all-time high. The Employment Index reflected growth, even though the constrained labor pool continues to be an issue. Materials shortages, inflation and logistics continue to negatively impact the continuity of supply,” says Nieves.
INDUSTRY PERFORMANCE
The 17 services industries reporting growth in July — listed in order — are: Arts, Entertainment & Recreation; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; Retail Trade; Real Estate, Rental & Leasing; Transportation & Warehousing; Information; Other Services; Public Administration; Construction; Health Care & Social Assistance; Utilities; Professional, Scientific & Technical Services; Educational Services; Finance & Insurance; and Mining. No industry reported a decrease in July.
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 6.6 points and now is at 67.0
- The New Orders Index increased 1.6 points and is currently at 63.7
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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