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Economy in Brief

U.S. ISM Nonmanufacturing Index Indicates Improvement in Growth
by Tom Moeller August 04, 2010

The U.S. service sector is holding up despite slower growth elsewhere. The July Composite Index for the service and construction sectors from the Institute for Supply Management (ISM) improved slightly to 54.3 after its June dip to 53.8. As a result, the level remained nearly the highest since early-2007 and has risen considerably from a low of 37.2 late in 2008. The latest figure beat Consensus expectations for a reading of 53.0. Since the series' inception in 1997 there has been a 65% 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.

Improvement in the overall index was led by a rise in the employment and new orders series. Rising above the break-even level of 50 for the first time since December 2007, the jobs number improved further from the low of 31.1 in November 2008. Seventeen percent of respondents increased hiring while 10% reported fewer jobs. That was the lowest percentage since June 2007. 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.

The business activity component slipped to 57.4, its lowest level since February. An increased 16% of respondents indicated lower activity and a lesser 27% reported higher activity. Vendor delivery speeds also quickened and reduced the index to its lowest since March.

The pricing power index fell further to 52.7 which was its lowest since September, but still it was up sharply from the late-2008 low. Twenty-one percent of respondents reported higher prices while an improved 8% reported them lower. At the worst, late in 2008, 41% reported lower prices. Since its inception ten years ago, there has been a 71% 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 indication of overall economic conditions 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.

The ISM data are available in Haver's USECON database.

ISM Nonmanufacturing Survey July June May July '09 2009 2008 2007
Composite Index 54.3 53.8 55.4 46.7 46.2 47.3 53.5
   Business Activity 57.4 58.1 61.1 47.0 48.0 47.4 56.0
   New Orders 56.7 54.4 57.1 48.6 47.9 47.0 54.8
   Employment 50.9 49.7 50.4 41.3 39.9 43.8 52.0
   Supplier Deliveries (NSA) 52.0 53.0 53.0 50.0 49.0 51.1 51.1
Prices Index 52.7 53.8 60.6 39.7 49.4 66.0 63.8
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