March 2013 ISM Services Index Decline May Be Just Noise

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The March 2013 ISM non-manufacturing (aka services) index continues its 2+ year growth cycle, but declined from 56.0 to 54.4 (above 50 signals expansion). This was below the range of market forecasts of 55.0 to 55.5.

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 well inside expansion territory.  The Business Activity sub-index only was marginally less good suggesting to this author that the general upward trend of ISM services seen over the last few years remains in play.

This index and its associated sub-indices are fairly volatile – and one needs to step back from the data and view this index over longer periods than a single month.

The Business Activity sub-index contracted marginally 0.4 points after expanding marginally 0.5 last month. It is in expansion territory – and remains in the middle of the range seen since 2010.

ISM Services – Business Activity Sub-Index

The New Orders Index fell a significant 3.6 points after rising 3.8 points last month. This sub-index is in expansion territory – and is now on the low side of the range seen since 2010.

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 54.4 percent in March, 1.6 percentage points lower than the 56 percent registered in February. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.5 percent, which is 0.4 percentage point lower than the 56.9 percent reported in February, reflecting growth for the 44th consecutive month. The New Orders Index decreased by 3.6 percentage points to 54.6 percent, and the Employment Index decreased 3.9 percentage points to 53.3 percent, indicating growth in employment for the eighth consecutive month. The Prices Index decreased 5.8 percentage points to 55.9 percent, indicating prices increased at a slower rate in March when compared to February. According to the NMI™, 15 non-manufacturing industries reported growth in March. The majority of respondents’ comments continue to be positive about business conditions; however, there is an underlying concern regarding the uncertainty of the future economy.”


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

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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