The Institute for Supply Management’s Non Manufacturing — or Service — survey rose in December to 57.1 from 55.0 in November. 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 December relative to November. This is the fourth straight month of acceleration in the overall index and makes it 12 straight months that it has been over the magic 50 level.
The number came in much better than the 55.7 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 is no longer the case, as the Service index edged out the 57.0 level on the Manufacturing index. The Manufacturing index was reported on Monday.
Sub-Indexes Balanced
Five of the sub-indexes increased and five fell on the service side this month. All but one are above the magic 50 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 soared 6.5 points this month, reaching the very robust level of 63.5. Fourteen industries reported higher business activity and just two reported a slowdown in activity. Those two are both tied to the government more than the private sector: Public Administration and Education.
The most important index for the very short-term future is the backlog of orders index. That fell by 3.0 points to 48.5, making it the only sub-index below the magic 50 level.
There were five industries reporting an increase in backlog, and five with a decline. Apparently the big increase in activity ate into the order backlogs. As businesses work off their existing backlog of orders, they need to replace them with new orders. There, the news is also positive, with a rise of 5.3 points to 63.0.
The sharp rise in both the activity index and the new orders index certainly mitigates the decline in the current backlog. There were 14 industries reporting higher new orders and two reporting declines — again, Public Administration and Education.
The employment sub-index is also very important, and it seems to contradict what we got in the ADP employment report this morning. The 2.2 point decrease is discouraging, but we are still on the right side of the 50 mark, but just at 50.5. That certainly does not seem to square with the massive 270,000 job increase reported for the service sector by ADP this morning.
Mixed Reports on Manufacturing
The manufacturing side of the economy still looks much stronger according to the ISM data, with a reading of 55.7, although that was down 1.8 points on the month. The ADP report showed manufacturing job growth lagging with a gain of just 23,000 jobs in December.
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). Nine industries reported an increase in payrolls and seven reported a decline. I suppose it will be up to the BLS report on Friday to “break the tie.”
The graph below tracks the overall composite index and the key activity, new orders and employment sub indexes. For some reason, the St. Louis Fed database does not have the data for the composite index (red line) going back nearly as far as for the key sub-indexes. The Activity index and the New Orders index are at levels not seen since August and February of 2005, respectively. Also note that the employment index has historically tended to be well below the other key indexes.
Good – Not Great – Report
Overall, this was a good, 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. The decline in the employment sub-indexes for both the Service and Manufacturing sides is a bit troubling, but is at odds with the rest of the employment data that has been coming out recently.
Both the import and export sub-indexes fell by 3.5%, which would seem to indicate a deceleration in the growth of international trade, but probably not too much of an effect on the overall trade deficit. At 56.0, the export index is still comfortably above the 51.0 level of the import index, so it seems to be pointing to a continued improvement in the trade deficit. That would be very good news indeed, as the trade deficit is to my mind a far more serious economic problem, particularly in the short to medium term, than is the budget deficit.
It is the change in the trade deficit, not its level, that influences GDP growth. It is the level that determines how quickly the country is going into debt to the rest of the world. Even with the recent improvements, the absolute level of the trade deficit is disastrous, but progress in bringing it down to just awful will greatly help GDP growth.
The table below comes from the ISM report and shows the sub-indexes for the service index, as well as the corresponding sub-indexes on the manufacturing side.
* Non-Manufacturing ISM Report On Business® data is seasonally adjusted
