U.S. ISM Nonmanufacturing Index Improves Further

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.

No doubt the job market has yet to materially improve. However, the latest report from the payroll processor ADP in their National Employment Report showed an easing in the rate of contraction. It indicated that private nonfarm payrolls fell 532,000 last month after a revised 545,000 decline during April. (Recent months' declines were revised deeper from the earlier estimates.) The latest reading was the sixteenth consecutive monthly decline, but the annualized rate of decline in payrolls eased somewhat to 6.3% during the last three months.

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.

Consumers still are shying away from big-ticket expenditures. The added evidence of that trend is that unit sales of light vehicles during May increased just 6.4% m/m to make up an April decline. Year-to-date, total May vehicle sales remained down 3.8% at 9.91 million units (SAAR).

U.S. unit sales of light vehicles rebounded 7.0% to 7.26M units, still near the lowest since 1982 according to the Autodata Corporation and Ward's Automotive News. (Seasonal adjustment of the figures is provided by the U.S. Bureau of Economic Analysis). Sales of domestically made light trucks rose 9.1% to 4.01M units while auto sales rose a lesser 4.5% to 3.25M units. Sales of domestic vehicles YTD are down 5.6%.

Imported light vehicle sales also rose but they made up only about one-third of their 14.0% m/m April decline. At 2.66M units they remained near their lowest level in roughly ten years. Sales of imported light truck sales rose 9.4% to 0.91M units while sales of imported autos rose a modest 2.7% returning only to their February level. Sales of imported vehicles YTD increased 1.3%.

Overall, import's share of the U.S. light vehicle market fell again, last month to 26.8% which was their lowest level of this year. Nevertheless, the figure remained up from the 2008 average of 26.3%. (Imported vehicles are those produced outside the United States.) Imports' share of the U.S. car market totaled 34.9%, up slightly from the 2008 average, while the share of the light truck market was 18.6%, roughly equal to last year.

The U.S. vehicle sales figures can be found in Haver's USECON database.

The Financial Crisis - Toward an Explanation and Policy Response from the Federal Reserve Bank of Richmond is available here.

The outplacement firm of Challenger, Grey & Christmas indicated that job cut announcements eased for the fourth consecutive month. The announcement of 111,182 layoffs followed 132,590 during April. This cycle's largest layoff total occurred in January when there were 241,749 cuts. Challenger also reported, however, that announced hiring plans fell sharply after their jump during April.

Announcement of job cuts in the pharmaceutical industry fell even further after the sharp April decline to 698. Announcements in the retail industry also fell for the fourth consecutive month while job cuts in the real estate industry evaporated. Cuts in the retail industry fell as did cuts in the insurance and in the industrial goods sectors.

Picking up some steam were job cut announcements in the computer and in the construction sectors. The health care sector job cut announcements rose sharply.

During the last ten years there has been a 67% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment. Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.

The Challenger figures are available in Haver's SURVEYS database.

The real story this month is not that the services PMI in EMU continued to improve, but that in the UK the PMI reading for the services sector leapt over the neutral zone to score a positive reading at 51.72.

The UK is now showing the strongest service sector in EU. At 48.33 and still showing decline, France is in second place. Spain‘s service sector weakened this month, dropping from 42.30 to 39.14 and is now below Ireland’s reading.

The services reading for EMU is in the bottom 26% of its range. But that is stronger than the services reading from the EU Commission index for services; that reading is in the bottom 3.7% of is range. Consumer confidence for EMU is also low in the bottom 8% of its range.

The news here is that the service sector, as is true for the MFG sector, finds improvement is in train. That is good news and what we have come to expect. Different surveys show different degrees of change – that is not too surprising. Within the Zone we have countries moving at different speeds- not surprising either–as well as in different directions, and that is not good at all. The UK is the strongest EU country in terms of its service sector, Spain with 18% unemployment is seeing its service sector being dragged down. Were Spain the UK its currency might drop to stimulate the economy, but since Spain is In EMU and the UK is out, that possibility is not Spain’s and the UK does not need such stimulus. Spain is a problem for EMU and despite rhetoric to the contrary the Zone itself owns Spain some assistance. In a currency union, even one with separate fiscal responsibilities like fiscal Japanese lunch box there still are joint responsibilities to the members.