The Institute for Supply Management’s Non Manufacturing, or Service, survey fell in September to 53.0 from 55.3 in August. Still, it was better than the consensus expectation that it would decline to 52.8. It is not a great reading in an absolute sense. Over the last year it has averaged 55.3, and it hit a high or 59.7 in February.
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 feint 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. However and the rate of growth slowed slightly in September, relative to August.
This makes it 22 straight months that it has been over the magic 50 level. On Monday, ISM Manufacturing also showed slow but positive growth. It rose to 51.6 from 50.6, but it, too, was much stronger than the expected level of 50.5.
Results by Sub-Index
Like the Manufacturing survey, this index is made up of ten sub-indexes that roughly correspond to the manufacturing sub-indexes. Six of the sub-indexes fell while four increased on the service side this month. Seven are above the magic-50 level.
The performance of the more important sub-indexes were mixed (relative to August). The most important measure of current business activity is, well, the business activity sub-index. It rose 1.5 points this month, to 57.1, which is a very solid reading. Nine industries reported higher business activity and just four reported a slowdown in activity. Thus, current business activity in August was pretty good on the service side.
The most important index for the very short-term future is the backlog of orders index. That rose by 5.0 points to 52.5. This was very welcome news, and stands in distinct contrast to the manufacturing report, where the backlog sub-index plunged to 41.5.
While the increase is very welcome, the level indicates that order backlogs are growing, but slowly. Still, that is better than shrinking the way they were in August. There were six service industries reporting an increase in backlog, and three with a decline.
A rising backlog is a good indication that activity is going to rise in the near future. As businesses work off their existing backlog of orders, they need to replace them with new orders. There the news was also good, with a gain of 3.7 points to 56.5. That is a healthy level. There were nine industries reporting higher new orders and five reporting a decline.
The employment sub-index is also very important, especially with unemployment running at 9.1%, and no jobs created on balance in August. The 2.9 point decline is very disappointing, and probably the worst single data point in this report. It is now at a level of 48.7, which means that non-manufacturing employment is shrinking, not growing.
As FAR more people are employed on the service side of the economy than in manufacturing, this is troubling. The employment sub-index was actually one of the stronger parts of the manufacturing report with a 2.0 point rise to 53.6.
On the other hand, we just got the ADP report this morning, and it showed a decline in manufacturing jobs in September along with a fairly healthy rise in private service sector jobs. Six service industries reported higher employment while eleven reported trimming payrolls.
This is the first employment sub-index reading below the magic 50 level in over a year. 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, then some of them are seasonally adjusted). 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.
Encouraging Report
Overall, this was encouraging report. It was well above expectations, though 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 50 mark. We are safe for now, but neither is all that far away from dropping below the magic-50 level, so it would not take that much to raise the new recession odds.
Three of the four key sub-indexes showed solid improvements and are comfortably above the 50 line. The employment index was the ugly duckling. While it was a decent report, it does not mean 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 though 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.
