April 2012 ISM Services: Less Good but Still Indicating Growth

Written by Steven Hansen

The April 2012 ISM non-manufacturing index continues its 2+ year growth cycle, but fell from 56.0 to 53.5 (above 50 signals expansion). The number was below market estimates which ranged from 55.5 to 56.5. The most important elements of this survey remain clearly in expansion territory.

Whether this index rises or falls in a particular month is not material – it is the long term trend lines. Here, the index is swinging around wildly – and it is hard to argue any long term trend. The good news is that the important components of this index remain clearly in expansion territory. The big monthly swings of this index in the New Normal are indicative of an economy whose growth is pulsing.

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. Both of these indices are saying the economy is improving, and a recession is not in the cards.

The Business Activity sub-index was again less good – but remains firmly in expansion territory.

The New Orders Index also was less good. This sub-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 53.5 percent in April, 2.5 percentage points lower than the 56 percent registered in March. This indicates continued growth this month, but at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 54.6 percent, which is 4.3 percentage points lower than the 58.9 percent reported in March, reflecting growth for the 33rd consecutive month. The New Orders Index decreased by 5.3 percentage points to 53.5 percent, and the Employment Index decreased by 2.5 percentage points to 54.2 percent, indicating continued growth in employment at a slower rate. The Prices Index decreased 10.3 percentage points to 53.6 percent, indicating prices increased at a significantly slower rate in April when compared to March. According to the NMI, 15 non-manufacturing industries reported growth in April. Respondents’ comments affirm the slowing rate of growth. In addition, they remain concerned about rising fuel costs and the impact on shipping, transportation and petroleum-based product costs.”

INDUSTRY PERFORMANCE – The 15 non-manufacturing industries reporting growth in April — listed in order — are: Retail Trade; Information; Construction; Management of Companies & Support Services; Arts, Entertainment & Recreation; Educational Services; Finance & Insurance; Accommodation & Food Services; Wholesale Trade; Real Estate, Rental & Leasing; Transportation & Warehousing; Other Services; Public Administration; Professional, Scientific & Technical Services; and Health Care & Social Assistance. The three industries reporting contraction in April are: Agriculture, Forestry, Fishing & Hunting; Utilities; and Mining.

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 if you stand far enough back from this graph, month-to-month movements have not correlated well with the BLS Service Sector Employment data. [graph below updated through March 2012 data].

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