ISM Non-Manufacturing Survey for August 2010 Says Economy Slowing

90% of the jobs in America are in the non-manufacturing sector. The ISM non-manufacturing survey for August 2010 indicates the economy is still growing – but at a slower rate.

This is a survey which is people’s opinion. The ISM survey methodology is the worst of all surveys. That said, it is a piece of information that we need to use when we analyze other data. It appears a month ahead of hard data. If we use this data like opinion exchanged during a cocktail party, we keep it in the right place in our mind.

Highlights of the ISM press release:

“The NMI (Non-Manufacturing Index) registered 51.5 percent in August, 2.8 percentage points lower than the 54.3 percent registered in July, indicating continued growth in the non-manufacturing sector but at a slower rate. The Non-Manufacturing Business Activity Index decreased 3 percentage points to 54.4 percent, reflecting growth for the ninth consecutive month, but at a slower rate than in July. The New Orders Index decreased 4.3 percentage points to 52.4 percent, and the Employment Index decreased 2.7 percentage points to 48.2 percent, reflecting contraction after one month of growth. The Prices Index increased 7.6 percentage points to 60.3 percent in August, indicating that prices increased significantly in July. According to the NMI, nine non-manufacturing industries reported growth in August. Respondents’ comments continue to be mixed about business conditions and the state of the overall economy.”

I focus on new orders and backlog – but employment decline came as a surprise in light of the BLS August 2010 jobs report which indicated the opposite.

The trend in new orders is in a rapid decline from those who believe new orders are growing. The good news is that those seeing declines are relatively stable. The release provided the following insight:

The nine industries reporting growth of new orders in August — listed in order — are: Arts, Entertainment & Recreation; Construction; Finance & Insurance; Accommodation & Food Services; Transportation & Warehousing; Information; Educational Services; Public Administration; and Wholesale Trade. The eight industries reporting contraction of new orders in August — listed in order — are: Mining; Agriculture, Forestry, Fishing & Hunting; Management of Companies & Support Services; Other Services; Professional, Scientific & Technical Services; Utilities; Retail Trade; and Health Care & Social Assistance.

Backlog is a true economic indicator which measures the overall economic health. If backlog is declining, there is overcapacity and too much employment. The concern here again is a growing trend of decreasing backlog. The release stated:

Of the total respondents in August, 45 percent indicated they do not measure backlog of orders. The six industries reporting an increase in order backlogs in August — listed in order — are: Construction; Transportation & Warehousing; Health Care & Social Assistance; Accommodation & Food Services; Wholesale Trade; and Public Administration. The seven industries reporting lower backlog of orders in August — listed in order — are: Utilities; Mining; Other Services; Professional, Scientific & Technical Services; Retail Trade; Information; and Finance & Insurance.

For now, Econintersect’s economic theme of slowing growth remains validated.