The Institute for Supply Management’s Non-Manufacturing, or Service, survey rose in September to 53.2 from 51.5 in August. Like its venerable brother, the manufacturing survey, this is a “magic 50” index, where any reading above 50 indicates that the economy is expanding and anything below 50 represents an economic contraction. Thus, this means that the service side of the economy, which is far larger than the manufacturing side, is not only growing, but the rate of growth accelerated in September, relative to August.
However, that absolute level of the index at 53.2 is just OK, not spectacular. Still, the number came in much better than the 51.8 consensus expectation.
Like the manufacturing survey, this index is made up of ten sub-indexes that roughly correspond to the manufacturing sub-indexes. In this recovery, the manufacturing side of the economy has been stronger than the service side. That still remains the case as the service index is still lower than the 54.4 level on the manufacturing index, but the manufacturing index is falling and the service index is rising, thus rapidly narrowing the gap.
Five of the sub-indexes increased and five fell on the service side this month, and eight are above the magic fifty level. However, the weakness was in some of the more important of the sub-indexes. The most important measure of current business activity is, well, the business activity sub-index. It dropped 1.6 points this month, but still remains comfortably over the 50 level at 52.8.
Ten industries reported higher business activity and four reported a slowdown in activity. The most important index for the very short-term future is the backlog of orders index. That fell by 2.5 points, and troublingly it fell below the 50 mark. There were four industries reporting an increase in backlog, and six with a decline. However, if we look just a little bit further ahead, the key sub-index is the number of new orders. There the news is significantly better, with a rise of 2.5 points to 54.9.
However, there were eight industries reporting higher new orders and seven reporting declines, so the increase does not seem all that broad-based. The healthy increase in the new orders sub-index is in contrast to the 2.0 point decline on the manufacturing side reported last Friday.
With the big employment report coming up this Friday, the employment sub-index is also very important. The 2.0 point increase is encouraging, as is the fact that we are now on the right side of the 50 mark, but just barely. The manufacturing side of the economy still looks much stronger according to the ISM data, though in recent months that has not really been confirmed by the BLS payroll numbers.
However, growth appears to be slowing on the manufacturing side, while employment growth in the service sector (which, after all, employs far more people than does manufacturing) is just moving into positive territory (it has been bouncing around the 50 level for several months now). Nine industries reported an increase in payrolls and six reported a decline. The breakdown of private sector job creation/loss in the Employment Report later this week should be interesting.
By far the biggest increase this month on the service side came from higher export orders, with a huge 11.5 point increase that moved it from contraction to a very healthy level of 58.0. We traditionally run a trade surplus in services, but it is not nearly enough to offset the massive trade deficit on the goods (manufacturing) side. This big increase seems to me to be tied to the weakness in the dollar we have seen in the last few months.
At this point, a weak dollar is what the economy needs. It will result in higher exports and lower imports and should help make a dent in the trade deficit, which is a far bigger short-term problem for the economy than is the budget deficit.
In Summation
Overall, this was a good report. It is highly unlikely that the economy will slip back into a double-dip recession if the ISM service index and the manufacturing index are both above the 50 mark.
As the report was well above expectations, the stock market should like it. The acceleration in growth is very welcome, but we are gong to need a lot more if were are going to make a serious dent in the unemployment rate, and be able to eventually move from being in a recovery to actually being in an expansion (recovery being the point from when the economy stops falling, June 2009 according to the NBER) until real GDP reaches its previous peak, expansion being any growth beyond that peak.
Thus as a result, the early part of a recovery is just as painful as the latter part of the recession, the end of the recession is simply crossing the stream at the bottom of the valley and starting up the other side).
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