The Institute for Supply Management’s (ISM) Non-Manufacturing, or Services index rose to 54.3 in July from 53.8 in June. It was also far better than the consensus expectation of 53.0.
Like its “older brother,” the ISM Manufacturing index, any reading over 50 indicates that the economy in that sector is expanding, and any reading below 50 indicates contraction. Also like its older brother, the overall index is made up of ten sub-indexes (which roughly correspond to each other).
While the Services index does not have as long a history as the Manufacturing index (which used to be called the Purchasing Managers Index or PMI, and goes all the way back to the 1920’s), it covers a much larger part of the nation’s economy. While the overall index for services it still below that of manufacturing, on Monday the Manufacturing index showed a 0.7 point decline (to 55.5), rather than the 0.5 point increase shown on the Services side.
On the other hand, five of the ten sub-indexes declined and only three increased while two were unchanged, while on the Manufacturing side, six were up and four were down. In both surveys, though, nine of the ten sub-indexes were above the magic 50 mark.
Not all of the sub-indexes are of equal importance, however. The most important indicator of what is happening now on the Services side is the Business Activity index, which roughly corresponds to the Production index on the Manufacturing side. It dropped 0.7 points to a still very healthy level of 57.4.
The best indicator of the very immediate short-term future is the Backlog of Orders index, and there, too, the news was not good, as it fell 3.5 points to 52.0. On the other hand, looking just a little bit farther out, the New Orders index becomes the most important indicator, and it rose 2.3 points to 56.7.
Taken together, these three sub-indexes seem to indicate that there was a bit of a short-term pause -- a summer slump, if you will -- in the expansion of the Services side, but that growth will soon pick up again. On the Manufacturing side, all three of these key indexes fell in July, but remain at healthy levels.
With unemployment at 9.5% (for June; we will see what it was for July on Friday) the Employment index takes on additional importance. It gained 1.2 points, and is back above the magic 50 level at 50.9. That is still far below the 58.6 level on the Manufacturing side (which also posted a gain).
On the other hand, in the ADP report this morning on private sector payrolls (see "ADP Sees Private Sector Gain Jobs") the Services side was shown to have gained 63,000 jobs, while 6,000 jobs were lost in Manufacturing. Hopefully the BLS will “settle the dispute” in the favor of the ISM Manufacturing index on Friday.
As with the Manufacturing index, the ISM lists the industries that are showing the most improvement and deterioration for each of the sub-indexes. Surprisingly, the industry that consistently shows up on the “good” side this month is Real Estate, Rental and Leasing. Commercial real estate has been plagued with high vacancy rates and falling values for buildings. This report indicates that things might be taking a turn for the better.
That would be good news for the small and medium sized banks in the country, many of which are heavily exposed to commercial real estate. It would also be a positive indication for many of the big REITs like Vornado (VNO) and Simon Property (SPG), as well as some of the Real Estate management firms like Jones Lang LaSalle (JLL).
Overall, this was a better than expected -- and thus encouraging -- report. However, the news from the key sub-indexes is less positive than that of the overall index. It seems to point to a slow recovery, but a recovery nonetheless, and not that much danger of falling into a double dip. The Services sector is about 8X as large as Manufacturing (but generally more stable) as a share of GDP, so improvements on the Services side of things are very important.
The table below compares the Services and Manufacturing indexes and sub-indexes and is from the ISM report, which is available here.
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While the Services index does not have as long a history as the Manufacturing index (which used to be called the Purchasing Managers Index or PMI, and goes all the way back to the 1920’s), it covers a much larger part of the nation’s economy. While the overall index for services it still below that of manufacturing, on Monday the Manufacturing index showed a 0.7 point decline (to 55.5), rather than the 0.5 point increase shown on the Services side.
On the other hand, five of the ten sub-indexes declined and only three increased while two were unchanged, while on the Manufacturing side, six were up and four were down. In both surveys, though, nine of the ten sub-indexes were above the magic 50 mark.
Not all of the sub-indexes are of equal importance, however. The most important indicator of what is happening now on the Services side is the Business Activity index, which roughly corresponds to the Production index on the Manufacturing side. It dropped 0.7 points to a still very healthy level of 57.4.
The best indicator of the very immediate short-term future is the Backlog of Orders index, and there, too, the news was not good, as it fell 3.5 points to 52.0. On the other hand, looking just a little bit farther out, the New Orders index becomes the most important indicator, and it rose 2.3 points to 56.7.
Taken together, these three sub-indexes seem to indicate that there was a bit of a short-term pause -- a summer slump, if you will -- in the expansion of the Services side, but that growth will soon pick up again. On the Manufacturing side, all three of these key indexes fell in July, but remain at healthy levels.
With unemployment at 9.5% (for June; we will see what it was for July on Friday) the Employment index takes on additional importance. It gained 1.2 points, and is back above the magic 50 level at 50.9. That is still far below the 58.6 level on the Manufacturing side (which also posted a gain).
On the other hand, in the ADP report this morning on private sector payrolls (see "ADP Sees Private Sector Gain Jobs") the Services side was shown to have gained 63,000 jobs, while 6,000 jobs were lost in Manufacturing. Hopefully the BLS will “settle the dispute” in the favor of the ISM Manufacturing index on Friday.
As with the Manufacturing index, the ISM lists the industries that are showing the most improvement and deterioration for each of the sub-indexes. Surprisingly, the industry that consistently shows up on the “good” side this month is Real Estate, Rental and Leasing. Commercial real estate has been plagued with high vacancy rates and falling values for buildings. This report indicates that things might be taking a turn for the better.
That would be good news for the small and medium sized banks in the country, many of which are heavily exposed to commercial real estate. It would also be a positive indication for many of the big REITs like Vornado (VNO) and Simon Property (SPG), as well as some of the Real Estate management firms like Jones Lang LaSalle (JLL).
Overall, this was a better than expected -- and thus encouraging -- report. However, the news from the key sub-indexes is less positive than that of the overall index. It seems to point to a slow recovery, but a recovery nonetheless, and not that much danger of falling into a double dip. The Services sector is about 8X as large as Manufacturing (but generally more stable) as a share of GDP, so improvements on the Services side of things are very important.
The table below compares the Services and Manufacturing indexes and sub-indexes and is from the ISM report, which is available here.
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.
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