The Institute for Supply Management’s Non-Manufacturing — or Service — survey rose in November to 55.0 from 54.3 in October. 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 November relative to October.
However, that absolute level of the index at 55.0 is just OK, not spectacular. Still, the number came in better than the 54.5 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 56.6 level on the Manufacturing index. The Manufacturing index was reported yesterday, but was somewhat weaker than expected.
Results by Sub-Index
Six of the sub-indexes increased and four fell on the service side this month. All are above the magic fifty level. However, the performance of the more important of the sub-indexes was mixed.
The most important measure of current business activity is, well, the business activity sub-index. It fell 1.4 points this month, but still remains comfortably over the 50 level at 57.0. Ten industries reported higher business activity and six reported a slowdown in activity.
The most important index for the very short-term future is the backlog of orders index. That fell by 0.5 points to 51.5. There were six industries reporting an increase in backlog, and four 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 also positive, with a rise of 1.0 points to 57.7. There were ten industries reporting higher new orders and four reporting declines.
The employment sub-index is also very important, and it seems to contradict what we got in the employment report this morning. The 1.8 point increase is encouraging, but hardly exciting. We are on the right side of the 50 mark, but just at 52.7.
The manufacturing side of the economy still looks much stronger according to the ISM data, with a reading of 57.5, although that was down two ticks on the month. That was not really been confirmed by the BLS payroll numbers, however, which showed a loss of 13,000 manufacturing jobs for the month, and a gain of 65,000 service sector jobs.
Employment growth in the service sector (which, after all, employs far more people than does manufacturing) is just barely into positive territory (it has been bouncing around the 50 level for several months now). Eight industries reported an increase in payrolls and five reported a decline.
By far the biggest decline this month on the service side came from prices, with a 5.1 point drop, but it is still at the highest level of any of the sub-indexes at 63.2. While services are not as big a factor in terms of international trade as is manufacturing, we do tend to run a trade surplus in services. There the news looks pretty good. The sub-index for new export orders increased by 4.0 points to 59.5, while the import sub-index was only up 0.5 points to 54.5.
OK Report, Not Great
Overall, this was an OK, but not great 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 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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