The Institute for Supply Management’s (ISM) non-manufacturing, or Services, index came in at 53.0 for February, up from 50.5% in January. This was well ahead of the consensus expectation that it would increase to 51.0. Any reading over 50 indicates that the service side of the economy is expanding.
While the Services index is still lagging behind the Manufacturing index, which was reported on Monday at 56.5, at least it is rising — the Manufacturing index pulled back (showing a slower rate of expansion than in January, but retains a healthy pace of growth). The overall index bottomed out in November of 2008 at 37.2, so over the longer term there has been a very significant improvement.
Like the Manufacturing index, the Services index is made up of 10 sub-indexes that roughly correspond to the 10 sub-indexes for the Manufacturing survey. The comparison between the two is shown in the table below (from the ISM report: http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Overall, seven of the sub-indexes showed improvement in February and six are above the magic 50 line.
Business Activity Index
The most important of the sub-indexes as a gauge of current economic activity is not surprisingly the business activity index (which is the analog to the production index on the manufacturing side). It posted a 2.6% rise to 54.8. However, the increase was driven by a sharp decline in the percentage of respondents reporting lower activity (20% rather than 30%). The percentage of firms reporting higher activity actually fell as well, to 23% from 26%, while the percentage of firms reporting no change in business activity jumped.
New Orders
The most important leading indicator in the report is New Orders. There the index rose to 55.0, an increase of 0.3 points. There again, the rise was driven by a drop in respondents reporting lower new orders, and a jump in those reporting flat new orders. The percentage of firms reporting higher new orders actually declined.
In between the two (call it a shorter-term leading indicator) is the backlog of orders. There the reading was 46.0, an improvement of 0.5 points. Essentially, the order backlog is contracting, but is doing so at a slower rate. The same basic story is seen here as well, though the increase is driven by fewer respondents reporting things getting worse, not by an increase in those that say things are getting better.
Employment Index
The employment index is of particular interest given the extremely high rate of unemployment right now (9.7% in January; we will see on Friday where it was in February, most likely about 9.9%). The employment index has been below the 50 line now for over two full years. Here we actually did see an increase in the percentage of respondents that saw things getting better, not just a decline in those saying they are reducing employment.
However, the good news is that it increased a sharp 4.0 points to 48.6. In other words, according to the ISM, the Services sector is still shedding jobs, but is doing so at a much slower pace. In the January employment report, the Bureau of Labor Statistics (BLS) actually measured an increase in service jobs and a small decline in manufacturing jobs. This throws a bit of a question mark on the reliability of the ISM data, unless of course the BLS ends up revising things to show better manufacturing and worse service jobs when the report comes out on Friday.
Overall this was a positive report — nothing to get too giddy about, but it does show that the Services sector of the economy, which is far larger than the Manufacturing sector, is now solidly on the mend. However, the level of improvement indicated by a 53.0 reading is not enough to really move the needle yet in terms of getting the country back to work and repairing the damage that has been done.
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.
