The Institute for Supply Management’s non-manufacturing (Services) survey shows that the service sector of the economy is still contracting, but at a slower rate than it was in July. On Tuesday, its Manufacturing report (which has a much longer history) showed that the manufacturing side of the economy was starting to emerge from its long slump.

With the ISM surveys, 50 is the magic number that is the borderline between expansion and contraction. The August reading or 48.4 is a nice improvement over the July reading of 46.4, but still shows shrinkage. The Services Index bottomed out in November at 37.4 and was as low as 40.8 in March, so the services sector is making significant progress. The table below shows how the two surveys compare.

There are some bright spots in the services report. The estimate of current business activity broke above the 50 level with a 5.2 point jump to 51.3, and the new orders component is just a hair below to magic 50 level at 49.9.

Pricing registered a huge 21.8 surge. That was mostly due to a fall in the percentage of respondents who saw lower prices from 28% in July to just 6% in August. Most of them moved into the “seeing prices unchanged” column, rather than it being a huge surge in those seeing higher prices. Thus it really is more of a reduction of deflationary fears than a signal that inflation is about to erupt. Both surveys are seeing export orders pick up, which should mean good things on the net exports part of the GDP growth equation.

The biggest weakness in both of the reports is on the employment side, although both surveys did see improvement. However, the service sector of the economy employs far more people than does the manufacturing side, and while 43.5 is better than 41.5, it sure is no cause for celebration.

Surprisingly, only two industries reported an increase in employment in August, and one of them was Real Estate, Rental and Leasing. The other was in Health Care — that is not a surprise, but more employment in real estate sure is.

Inventories fell faster in August than in July for the services sector, however, with the exception of Retail Trade, inventories are less important to the business model of services companies than for manufacturing.

Transportation & Warehousing saw a pick-up in current business activity in August, but a drop in new orders. Transportation is a key reflection of how the economy is doing.  If goods are not moving on railroads like Norfolk Southern (NSC) or with the truckers like YRC Worldwide (YRC) then it is hard to believe that the rest of the economy is really doing better.  The drop in new orders is a little bit disconcerting there.

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