In distinct contrast to its report on manufacturing, the Institute for Supply Management’s Non-Manufacturing (Services) index fell in July to a reading of 46.4 from June’s 47.0. The July reading was a surprise as the consensus of economists expected it would rise to 48.0.

This is the 10th straight month where the Services index has been below the 50 level, indicating contraction. The index, which has a much shorter history (since 1997) than the Manufacturing index, hit a record low in November at 37.4. It had been up for three months in a row, rising from March’s level of 40.8, so the July report breaks a “winning streak” for the index.

The table below (from shows that while both the Manufacturing and Service indexes are below 50, the manufacturing number was substantially better than in June. The Manufacturing index came in well ahead of expectations. Every major component of the Manufacturing index except customer inventories registered a gain, while the Services index saw deterioration in eight of the ten components. The two that were up were supplier deliveries and Inventories, and let’s face it, inventories are a lot less significant to a service industry firm than they are to manufacturer (retail being the major exception).

The decline in the price index was particularly sharp. The silver lining of that is that it looks like inflation pressures are very well contained, which should allow the Fed to keep interest rates low for much longer than they otherwise might. Indeed, it still looks like deflation is a bigger worry then inflation at this point.

Perhaps the two most important components of the index were lower. Business Activity index fell 3.7 points. The percentage of firms that reported higher activity plunged to 19% from 28% in June, while the percentage reporting lower activity rose to 28% from 22%.The number reporting flat business conditions increased to 53% from 50%.

Business activity is a coincident indicator, while new orders are a leading indicator. There, the decline was just 0.5 points. The percentage of firms reporting lower orders was unchanged at 26%, but the percentage of firms reporting higher orders fell to 22% from 29%.

The order backlog number was even weaker than the new order index, falling to 42.0 from 46.0, as the pipeline of new orders is not keeping up with work being completed. The decline in the employment index to 41.5 from 43.4 does not bode well for the employment report due out on Friday. Still, the employment component is well above the 37.0 registered in April. The sector is still shedding jobs, but not as fast as it was in the spring.

Due to its much shorter history, the ISM service index is given much less weight by the market than the Manufacturing index, but Services makes up a much larger part of our economy than does Manufacturing. In recent years, Services has been a much stronger part of our economy than Manufacturing, especially when it comes to employment (which never really recovered from the last recession).

It is unusual to see the Manufacturing index stronger than the Services index. This report is a step back in the “two steps forward (at least ‘less worse’), one step back” pattern of economic data we have been seeing. When you stop falling off a cliff, you hit the ground. That does not mean you are ready to start climbing back up again, especially if the fall has left you with two broken legs.

The market has mostly been focusing on the good news of late, and doing its best to ignore the bad news. One industry that was weak in every category in this report was Transportation and Warehousing, which does not bode well for the Trucking firms like YRC Worldwide (YRC).

However, it does seem to contradict the manufacturing report. If manufacturing is getting stronger, why aren’t the goods moving anywhere?

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