The Institute for Supply Management’s Non-Manufacturing, or Service, survey rose in August to 53.3 from 552.7 in July, and matching its June level. That is much better than the consensus expectation that it would decline to just 51.0.
This is not a great reading in an absolute sense; the July reading was the lowest since January 2010. Still, it is strong evidence that we are not yet in a recession. While just “not being in a recession” does seem to be damning the economy with faint praise, it is significant since it looks like the market is pricing in a recession.
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 still growing — and the rate of growth accelerated in August relative to July.
This makes it 21 straight months that it has been over the “magic 50” level. Last week, the ISM manufacturing also showed slow but positive growth. It declined to 50.3 from 50.9, but it too was much stronger than the expected level of 48.5.
Breakdown of Sub-Indexes
Like the manufacturing survey, this index is made up of ten sub-indexes that roughly correspond to the manufacturing sub-indexes. This report is weak in an absolute sense, but not as weak as the manufacturing side. Fortunately, manufacturing is a much smaller part of the economy than the service side.
Four of the sub-indexes fell while six increased on the service side this month. Nine are above the magic 50 level.
Business Activity
The performance of the more important sub-indexes were mixed (relative to July). The most important measure of current business activity is, well, the business activity sub-index. It fell 0.5 points this month, to 55.6, but that is still a very solid reading. Eight industries reported higher business activity and just five reported a slowdown in activity. Thus, current business activity in August was OK on the service side.
Backlog of Orders
The most important index for the very short-term future is the backlog of orders index. That rose by 3.5 points to 47.5. While the increase is very welcome, the level still indicates that order backlogs are shrinking, but just at a slower pace than in July. There were just three industries reporting an increase in backlog, and eight with a decline.
A falling backlog is a good indication that activity is going to slow in the near future. As businesses work off their existing backlog of orders, they need to replace them with new orders. There the news is better, but not good, with a gain of 1.1 points to 52.8. That still indicates that new orders are rising, and at a better rate than in July, but still at an anemic pace. There were six industries reporting higher new orders and six reporting a decline.
Employment
The employment sub-index is also very important, especially with unemployment running at 9.1% and no jobs created on balance in August. The 0.9 point decline is downbeat, but not unexpected, as it fell to 51.6. It is roughly in-line with the manufacturing employment sub-index that came in at 51.8, down 1.7 points on the month. Both, however, are still pointing to job gains, and we have been seeing job gains in private industry, just not enough to make a serious dent in unemployment and barely enough to offset the continued layoffs in government jobs.
Seven service industries reported higher employment while five reported trimming payrolls. The employment sub-index has been above the magic 50 level for twelve straight months now.
One thing to keep in mind is that these are diffusion indexes (the reading is the number of positive responses, plus one half of negative responses). As such, they measure the number of companies that are adding or trimming jobs, not the number of jobs they are creating or losing. Thus it is not exactly an apples-to-apples comparison.
Still, over time, the ISM employment indexes, both manufacturing and non-manufacturing, have tended to track employment well. The graph below shows the history of the key sub-indexes. The declines in recent months are reason for concern, but not for panic.
Encouraging Report
Overall, this was encouraging report. It was well above expectations but the bar was not set all that high. The level is distinctly mediocre, but it is not a disaster. It is consistent with a continuation of the pseudo-recovery, where the economy is technically growing, but not fast enough for anyone to feel it, especially the army of the unemployed.
It is 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 magic 50 mark. We are safe for now, but neither is all that far away from dropping below the 50 level, so it would not take that much to raise the new recession odds.
As the report was above expectations, the stock market should note it, but the news is being swamped by yet more bad news out of Europe today. The business activity index was OK, but the market is more concerned with the future than the past. The news was mixed there.
The backlog index rose sharply, but is still showing declines, but now a more gradual run off, not falling off a cliff. The news is better when it comes to refilling the backlog with new orders, with that index both above the 50 level and rising. This report was encouraging, but hardly means that we are out of the woods.
This report covers a much bigger part of the economy, and though is often referred to as the Service survey, it covers more than that. I would point out that the strongest industry in this report was mining, which is not usually thought of as a service industry.
The table below comes from the ISM report and shows the sub-indexes for the service index, as well as the corresponding sub-indexes on the manufacturing side.
* Non-Manufacturing ISM Report On Business® data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. Manufacturing ISM Report On Business® data is seasonally adjusted for New Orders, Production, Employment, Supplier Deliveries and Inventories.
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