The Institute for Supply Management’s (ISM) non-manufacturing (or service) survey showed growth continuing at the same rate in May that it was in April with a reading of 55.4 (also the same 55.4 level in March). That was slightly below expectations, which were looking for a slight acceleration with a reading of 55.6. It was, however, the fifth month in a row that the overall index was above the “magic 50″ mark that separates expansion from contraction.
The service index covers a much larger part of the overall economy than does the manufacturing index, which was released on Tuesday (see ISM Survey Down Less Than Expected), but does not have anywhere near as long a history. As the table below (from the ISM report) shows, the manufacturing index is stronger than the service index (and has been for some time now).
Both indexes are composed of ten sub-indexes that roughly correspond to one another. While the overall level of the service index is lower, all ten of its sub-indexes are now above the 50 line, up from just 8 last month, and just 8 of the 10 manufacturing sub-indexes were in positive territory. Relative to April, five of the sub-indexes posted gains, four declined and one was unchanged.
Business Activity Index
The most important of the sub-indexes for gauging the current state of the economy is the business activity index, which roughly corresponds to the production index on the manufacturing side. It is at a very healthy level of 61.1, up 0.8 points from April. It is, however, well below the 66.6 level on the manufacturing side that is indicating an absolute boom (higher than all by 3% of months since 1979).
On the service side, 16 industries reported increasing business activity, and only one noted a decline. Surprisingly, the one that saw a decline was health care, while real estate rental and leasing was listed as the industry showing the most expansion. What was it the Bible said about the first being last?
New Orders Index
If the most important of the indexes for the present is the business activity index, the most important one for the medium-term future is the new orders index. That index fell 1.1 point, but still remains at a strong level of 57.1. In other words, new orders are still increasing, they just are not doing so at an accelerating pace. Again, 16 industries were reporting gains in new orders, while only health care reported a decline (and again, real estate was listed as showing the most improvement).
Employment Index
With the unemployment rate at 9.9% (for April; we will see where it was for May tomorrow) the employment sub-index takes on added importance, although the correlation between what the employment indexes have been saying and actual job growth as reported by the BLS has been weak of late. The employment index for the service survey finally moved into positive territory for the first time this cycle in May, with a reading of 50.4, up 0.9 points.
Manufacturing Index
The manufacturing index, on the other hand, has been above the 50 line for five months now, and is at a near-record-high level. The BLS has generally been reporting stronger job growth on the service side of the economy than on the manufacturing side.
It is important to note that the ISM service index includes construction, and in many other areas, construction gets lumped in with manufacturing as part of the goods-producing sector. The ADP (ADP) report today (ADP Sees Modest Job Growth) showed the service side of the economy far outperforming the goods-producing side of the economy with a gain of 78,000 private sector service sector jobs, and a loss of 23,000 jobs in the goods producing sector.
ADP put most of the blame for that on the construction industry (down 41,000) while registering a gain of 15,000 manufacturing jobs. Still, the two data points do seem to conflict with each other. Ten industries noted improvement, four a deterioration in hiring and one was unchanged.
Backlog of Orders Index
For the more immediate future, the backlog of orders index is probably the most important of the sub-indexes. There was a notable improvement in that sub-index with a gain of 6.5 points to 56.0, and pushing the order backlog sub-index over the 50 line. However, only 56% of firms in the survey measure order backlog.
The Takeaway
Overall, this is a solid if not spectacular report, and was more or less in line with expectations. It shows that the economic recovery is still on track, but is more sluggish on the service side of the economy than on the manufacturing side. It is not going to make anyone rethink their view of the economy one way or the other.
* Non-Manufacturing ISM Report On Business® data is seasonally adjusted for Business Activity
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
