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Economy in Brief

U.S. ISM Nonmanufacturing Index Ticks Lower But Stays Near May '08 High
by Tom Moeller November 4, 2009

Improvement in service sector activity continued to be evident in the latest purchasing report. Though the October Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) ticked slightly lower to 50.6, it still was nearly its highest level since May of last year. The latest figure roughly equaled Consensus expectations. A level of the ISM index above 50 indicates rising overall service sector activity. Since the series' inception in 1997 there has been a 64% correlation between the level of the composite index in the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.

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. The figures are available in Haver's USECON database.

Amongst the components, there was broad-based improvement tempered by a lower employment reading. The business activity index for the service sector remained above the break-even level of 50 for the third month. The new orders series also remained at its highest in two years, up from November's low of 35.6. The speed of vendor deliveries fell further (higher index level) to its slowest since January. Only the employment index deteriorated, falling to its lowest level since May. Since the series' inception in 1997 there has been an 80% 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 improved as the overall index moved back above 50. The pricing index ticked just slightly higher m/m to 53.0 but was up sharply from the December low of 36.1. Since its inception ten years ago, there has been a 73% 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 of 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 Nonmanufacturing Survey October September August Oct. '08 2008 2007 2006
Composite Index 50.6 50.9 48.4 44.6 47.4 53.5 55.7
   Business Activity 55.2 55.1 51.3 44.5 47.4 56.0 58.0
   New Orders 55.6 54.2 49.9 44.3 47.0 54.8 57.1
   Employment 41.1 44.3 43.5 41.7 43.8 52.0 53.8
   Supplier Deliveries 50.5 50.0 49.0 48.0 51.1 51.1 53.8
Prices Index 53.0 48.8 63.1 53.3 66.0 63.8 65.3
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