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Economy in Brief

U.S. ISM Nonmanufacturing Index Reverses Earlier Improvement
by Tom Moeller September 3, 2010

The U.S. service sector seems unable to sustain the improvement that began in 2009. The August Composite Index for the service and construction sectors from the Institute for Supply Management (ISM) dropped sharply to 51.5 from 54.3 in July. The latest level was the lowest since January and it fell short of Consensus expectations for a reading of 53.5. Nevertheless, the index remained up from a low of 37.2 late in 2008. 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.

The components of the ISM report showed uniform declines last month. The new orders series fell m/m by 4.3 points to its lowest since December 2007. The business activity component fell three points to 54.4, its lowest level since January. An increased 20% of respondents indicated lower activity and a stable 27% reported higher activity. The jobs number also reversed earlier gains with a 2.7 point decline to its lowest since January. Thirteen percent of respondents increased hiring while an increased 18% reported fewer jobs. 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. Finally, supplier delivery speeds picked up causing a decline in the index.

The pricing power index jumped to 60.3 and reversed nearly all the last two months' declines. It remained up sharply from the late-2008 low. Nineteen percent of respondents reported higher prices but only 4% 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 August July June August '09 2009 2008 2007
Composite Index 51.5 54.3 53.8 48.2 46.2 47.3 53.5
  Business Activity 54.4 57.4 58.1 50.9 48.0 47.4 56.0
  New Orders 52.4 56.7 54.4 50.0 47.9 47.0 54.8
  Employment 48.2 50.9 49.7 42.8 39.9 43.8 52.0
  Supplier Deliveries(NSA) 51.0 52.0 53.0 49.0 49.0 51.1 51.1
Prices Index 60.3 52.7 53.8 61.5 49.4 66.0 63.8
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