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Economy in Brief

U.S. April ISM Non-Manufacturing Index Improved, Trend Still Lower
by Tom Moeller May 5, 2008

For April, the Institute for Supply Management reported that its Composite Index for the non-manufacturing sector improved further. At 52.0, the index was up from 49.6 in March and it was well up from the recent low of 44.6 in January. Consensus expectations had been for a lower April reading of 49.1.

The trend in the index, however, remained under pressure. For the first four months of 2008 the index averaged 48.9. A level of 50 is the break even point between rising and falling activity in the service sector.

Beginning with the January 2008 Non-Manufacturing Report On Business®, a composite index is now calculated as an indicator of the overall economic condition for the non-manufacturing sector. It is a composite index based on the diffusion indexes for four of the indicators (business activity, new orders, employment and supplier deliveries) with equal weights. The latest report from the ISM can be found here.

The non-manufacturing business activity sub-index fell somewhat to 50.9 from 52.2 in March. So far in 2008 the index has averaged 48.9, down from 56.0 during all of last year. Since the series' inception in 1997 there has been a 48% correlation between the level of the business activity index for the non-manufacturing sector and the Q/Q change in real GDP for the services and the construction sectors. The correlation of the separate factory sector ISM index with the change in real GDP less just services is a higher 57%.

The new orders sub-index held about steady with March at 50.1 and the four month figure averaged 48.4 versus 54.8 last year. The supplier delivery index improved quite sharply last month to a reading of 56.0 from 49.0 in March. So far this year, however, the index still was steady with 2007 at 51.0.

The employment index also improved m/m to 50.8 from 46.9 in March. That was not enough, however, to lift the year to date average, at 47.1, above break even. The series remained below last year's level of 52.0. Since the series' inception in 1997 there has been a 56% correlation between the level of the ISM non-manufacturing employment index and the m/m change in payroll employment in the service producing plus the construction industries.

Pricing power continued firm. The prices paid index at 72.1 rose 1.3 points from March and added to that month's 2.9 point gain. The latest was the highest level since last November and it was well up from the 2007 average of 63.8. Since inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.

ISM surveys more than 370 purchasing managers in more than 62 industries including construction, law firms, hospitals, government and retailers. The non-manufacturing survey dates back to July 1997.

ISM Nonmanufacturing Survey April March April '07 2007 2006 2005
Composite Index 52.0 49.6 53.4 53.5 55.7 58.0
Prices Index 72.1 70.8 63.2 63.8 65.3 68.0
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