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Economy in Brief

U.S. ISM Nonmanufacturing Index Falls Again
by Tom Moeller April 3, 2009

The service sector remains under pressure. The March Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) slipped further to 40.8 from an unrevised February reading of 41.6. Consensus expectations were for a reading of 42.0. For the quarter as a whole, the index edged up to 41.8 from the low of 40.7 during 4Q '08. A level of the ISM index below 50 indicates declining activity. Since the series' inception in 1997 there has been a 48% correlation between the level of the business activity index in the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.

Despite the decline in the overall index, the business activity index improved last month. The employment index, however, offset that rise with a decline to near the cycle low. Since the series' inception in 1997 there has been a 56% correlation between the level of the ISM nonmanufacturing employment index and the m/m change in payroll employment in the service-producing plus the construction industries.

Pricing power fell back again after February improvement. Since its 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.

Beginning with the January 2008 Nonmanufacturing Report On Business®, the composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector. It is a composite index based on the diffusion indices 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.

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

Credit Market Competition and the Nature of Firms from the Federal Reserve Bank of New York is available here.

ISM Nonmanufacturing Survey March February March '08 2008 2007 2006
Composite Index 40.8 41.6 49.9 47.4 53.5 55.7
Prices Index 41.5 46.5 75.5 66.0 63.8 65.3
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