January 2012 ISM Non-Manufacturing Results Unexpectedly Strong

The January 2012 ISM non-manufacturing index blew the doors off of pundits expectations rising from 53.0 to 56.8 (above 50 signals expansion) – with the market expecting 53.0 to 53.1.   The most important elements of this survey remain clearly in expansion territory – and this survey remains strong.

There are two sub-indexes in the NMI, which have a good correlation to the economy – the Business Activity Index and the New Orders Index – and both have a good track record in spotting an incipient recession.

The January Business Activity Index was up significantly from December – and remains firmly in expansion territory.

The New Orders Index improved significantly from December 2011. It is a very noisy index now with an upward trend line. This index remains well away from recession territory.

The complete ISM manufacturing and non-manufacturing survey table is below.

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; this is not hard data.

From the ISM report:

“The NMI registered 56.8 percent in January, 3.8 percentage points higher than the seasonally adjusted 53 percent registered in December, and indicating continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.5 percent, which is 3.6 percentage points higher than the seasonally adjusted 55.9 percent reported in December, reflecting growth for the 30th consecutive month. The New Orders Index increased by 4.8 percentage points to 59.4 percent, and the Employment Index increased by 7.6 percentage points to 57.4 percent, indicating substantial growth in employment after one month of contraction. The Prices Index increased 1.5 percentage points to 63.5 percent, indicating prices increased at a slightly faster rate in January when compared to December. According to the NMI, 12 non-manufacturing industries reported growth in January. Respondents’ comments are mostly positive about business conditions. There is concern about cost pressures and the sustainability of the recent spike in activity.”

The 12 non-manufacturing industries reporting growth in January based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Information; Educational Services; Transportation & Warehousing; Accommodation & Food Services; Construction; Other Services; Retail Trade; Professional, Scientific & Technical Services; Finance & Insurance; Health Care & Social Assistance; and Wholesale Trade. The four industries reporting contraction in January are: Arts, Entertainment & Recreation; Mining; Utilities; and Public Administration.

Caveats on the use of 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 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, month-to-month movements have not correlated with the BLS Service Sector Employment data. [note graph below uses November 2011 data]

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