ISM Non-Manufacturing Survey Quixotic in December 2010

The ADP’s historically high service sector employment gains were followed by the ISM non-manufacturing survey indicated employment gains were flat for December. The headlines from the report:

“The NMI (Non-Manufacturing Index) registered 57.1 percent in December, 2.1 percentage points higher than the 55 percent registered in November, and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 6.5 percentage points to 63.5 percent, reflecting growth for the 13th consecutive month at a faster rate than in November. The New Orders Index increased 5.3 percentage points to 63 percent, and the Employment Index decreased 2.2 percentage points to 50.5 percent, indicating growth in employment for the fourth consecutive month, but at a slower rate. The Prices Index increased 6.8 percentage points to 70 percent, indicating that prices increased significantly in December. According to the NMI, 14 non-manufacturing industries reported growth in December. Respondents’ comments vary by company and industry, but overall are mostly positive about business conditions.”

Earlier this week, the ISM released the survey for manufacturing (analysis here) which concluded that the purchasing managers who are surveyed believe conditions were improving in December MoM.

However, this survey was so dysfunctional that it cannot be analyzed.  It flies in the face of hard data (employment), it is noisy in areas where there should be no noise (backlog), and overly noisy in other areas (prices).  When you analyze a document with obvious faults, it begs the question on the accuracy of the whole survey.  Garbage in, Garbage out.

The ISM surveys are viewed with respect in the business world – and everyone appreciates it is opinion, and not fact.  However, the December 2010 non-manufacturing survey has crossed a boundary into meaninglessness.

When it comes to which employment numbers to believe, which would you chose?  Would you believe the people who are writing the paychecks (ADP)?  Or would you believe the administrators or administrative assistants who fill out the ISM surveys?

The complete ISM survey can be viewed here.  Just remember to question credibility when you read it.