April 2013 ISM Services Index Not Painting a Picture of Healthy Growth

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The April 2013 ISM non-manufacturing (aka services) index continues its 2+ year growth cycle, but declined from 54.4  to 53.1 (above 50 signals expansion). This was below the range of market forecasts of 53.9 to 54.0.

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 was less good, while the the new orders sub-index was essentially unchanged.

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 fell 1.5 points. Although in expansion territory, it is now near the worst datapoint since the end of the Great Recession.

ISM Services – Business Activity Sub-Index

The New Orders Index also remains one of the worst datapoints since the end the Great Recession.

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 53.1 percent in April, 1.3 percentage points lower than the 54.4 percent registered in March. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55 percent, which is 1.5 percentage points lower than the 56.5 percent reported in March, reflecting growth for the 45th consecutive month. The New Orders Index decreased by 0.1 percentage point to 54.5 percent, and the Employment Index decreased 1.3 percentage points to 52 percent, indicating growth in employment for the ninth consecutive month. The Prices Index decreased 4.7 percentage points to 51.2 percent, indicating prices increased at a slower rate in April when compared to March. According to the NMI™, 14 non-manufacturing industries reported growth in April. Respondents’ comments remain mostly positive about business conditions. Cost management and revenue pressures are areas of concern for many of the respective companies.

INDUSTRY PERFORMANCE – The 14 non-manufacturing industries reporting growth in April — listed in order — are: Transportation & Warehousing; Retail Trade; Accommodation & Food Services; Construction; Management of Companies & Support Services; Arts, Entertainment & Recreation; Information; Utilities; Real Estate, Rental & Leasing; Wholesale Trade; Public Administration; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; and Finance & Insurance. The four industries reporting contraction in April are: Mining; Educational Services; Other Services; 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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