U.S. ISM Nonmanufacturing Index Improves While Prices Jump

Improvement in service sector activity regained its legs last month. The Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) rose to 48.4 last month after having slipped to 46.4 during July. The latest level was the highest since September of last year and the figure about matched Consensus expectations for a reading of 48.0. A level of the ISM index below 50 indicates declining activity. Since the series' inception in 1997 there has been a 65% 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.

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.

The improvement in the August index was broad-based amongst the component series. The business activity index for the service sector broached the break-even level for the first time since last September with a rise to 51.3. The new orders series neared that break-even level with an increase to 49.9, up from November's low of 35.6. Finally, the employment index rose to 43.5 and that was the highest level since September. 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 rise in service sector activity powered a sharp improvement in pricing power. The 21.8 point m/m jump in the price index to 63.1  placed the index at its highest level since last September. Twenty-three percent of firms reported higher prices while a significantly reduced 6%  reporting lower prices. 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 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.

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