U.S. ISM Nonmanufacturing Index Fell Sharply: Recession Indicated

The Composite Index for the nonmanufacturing sector from the Institute for Supply Management fell sharply in October. It declined to 44.4 from an unrevised 50.2 during September. The figure, which was weaker than Consensus expectations, was the lowest in the series' relatively brief ten year history.It rivaled the low during the 2001 recession.

The nonmanufacturing business activity sub-index also fell sharply to 44.2 which was the lowest level since this past January. Each figure was the lowest since the last recession. Since the series' inception in 1997 there has been a 48% correlation between the level of the business activity index for the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.

The employment index fell to 41.5, a new low for the series. 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.

The new orders sub-index fell sharply to a recession level of 44.0.

Pricing power also collapsed. The reading of 53.4 was its lowest level since 2003. 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.

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 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.

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.

Interpreting the Great Moderation: changes in the volatility of economic activity at the macro and micro levels from the Federal Reserve Bank of New York can be found here.

The payroll processor ADP indicated in its latest National Employment Report that October private nonfarm payrolls fell 157,000 after a revised 25,000 September decline. The latest was the third decline in as many months and it was the largest since November 2002. During the last three months payrolls have fallen 0.2%.

The U.S. Bureau of Labor Statistics will report on October payroll employment this Friday. Last month, the 25,000 worker decline in ADP's measure of private nonfarm payrolls was accompanied by a 168,000 (-0.7% y/y) worker decline in the BLS measure of private sector payrolls.

According to ADP and Macro Advisers, the correlation between the monthly percentage change in the ADP estimate and that in the BLS data is 0.90.

By the ADP measure, goods producing payrolls fell by 126,000 (-3.3% y/y). The largest decline was amongst medium sized payrolls which fell 65,000 (-3.6% y/y) followed by a 36,000 (-2.0% y/y) drop in small sized payrolls. Large payrolls fell 25,000 (-5.0% y/y).

Employment in the manufacturing sector fell 85,000 (-3.4% y/y) It has fallen in each month since late-2005.

Employment in the service producing industry added to the weakness in the goods producing sector and payrolls fell 31,000 (+0.9% y/y). It was their first decline since 2002. Medium sized payrolls fell 26,000 (+0.7% y/y) and large service producing payrolls dropped by 16,000 (-0.3% y/y). Small service producing payrolls rose by 11,000 (1.4% y/y).

ADP compiled the estimate from its database of individual companies' payroll information. Macroeconomic Advisers, LLC, the St. Louis economic consulting firm, developed the methodology for transforming the raw data into an economic indicator.

The ADP National Employment Report data is maintained in Haver's

USECON database; historical data go back to December 2000. The figures in this report cover only private sector jobs and exclude employment in the public sector, which rose an average 11,083 during the last twelve months

The full ADP National Employment Report can be found here, and the ADP methodology is explained here.