August 2012 ISM Services Index Continues to Show Expanding Economy

Written by Steven Hansen

The August 2012 ISM non-manufacturing index continues its 2+ year growth cycle, and rose marginally from 52.6 to 53.7 (above 50 signals expansion). This was above the market forecast of 51.0 to 52.4.

The economically intuitive components of this index remain in expansion territory, and is signalling the economy is not near a recession in August 2012.  There are two sub-indexes in the NMI which have good correlations to the economy – the Business Activity Index and the New Orders Index – and both have good track records in spotting an incipient recession.  Both are in expansion territory, but both also declined this month.

The Business Activity sub-index declined 1.6 points after rising 5.5 points last month. It remains in expansion territory – and is slightly below mid channel of the growth seen since the end of the recession.

ISM Services – Business Activity Sub-Index

The New Orders Index declined 0.6 points after rising 1.0 points last month. This sub-index is on the lower end of the channel seen since the end of the Great Recession – but is also in expansion territory.

ISM Services – New Orders Sub-Index

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 and is not hard data.

From the ISM report:

“The NMI™ registered 53.7 percent in August, 1.1 percentage points higher than the 52.6 percent registered in July. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1.6 percentage points lower than the 57.2 percent reported in July, reflecting growth for the 37th consecutive month. The New Orders Index decreased by 0.6 percentage point to 53.7 percent. The Employment Index increased by 4.5 percentage points to 53.8 percent, indicating growth in employment after one month of contraction. The Prices Index increased 9.4 percentage points to 64.3 percent, indicating substantially higher month-over-month prices when compared to July. According to the NMI™, 10 non-manufacturing industries reported growth in August. Respondents’ comments continue to be mixed, and for the most part reflect uncertainty about business conditions and the economy.”

INDUSTRY PERFORMANCE – The 10 non-manufacturing industries reporting growth in August — listed in order — are: Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Accommodation & Food Services; Utilities; Management of Companies & Support Services; Retail Trade; Real Estate, Rental & Leasing; Transportation & Warehousing; Professional, Scientific & Technical Services; and Other Services. The five industries reporting contraction in August are: Mining; Wholesale Trade; Information; Arts, Entertainment & Recreation; and Health Care & Social Assistance.

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.

ISM Services Employment Sub-Index vs BLS Non-Farm Services Employment

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