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Economy in Brief

U.S. ISM Nonmanufacturing Index Improves Further
by Tom Moeller June 3, 2009

Improvement in service sector activity is accompanying the factory sector's recent rise. The May Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) rose to 44.0 last month from an unrevised reading of 43.7 during April. The latest was the highest level since October of last year but it was slightly lower than Consensus expectations for a May reading of 45.0. A level of the ISM index below 50 indicates declining activity. Since the series' inception in 1997 there has been a 60% 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.

That latest rise came as the employment index rose to its highest level since October. 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.Also to the upside was the supplier deliveries index.

Countering these gains were declines in the business activity sub-index after two months of improvement. The new orders series also fell but just slightly. At 44.4 it remained well up from last November's low of 35.6.

Pricing power has shown moderate improvement this year in that earlier declines have not continued. The price index has been relatively stable in a range of 36 to 48 after reaching a high of 82.1 last Spring. 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.

ISM Nonmanufacturing Survey May April May '08 2008 2007 2006
Composite Index 44.0 43.7 51.2 47.4 53.5 55.7
   Business Activity 42.4 45.2 52.9 47.4 56.0 58.0
   Employment 39.0 37.0 48.3 43.8 52.0 53.8
Prices Index 46.9 40.0 75.6 66.0 63.8 65.3
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