The Institute for Supply Management's Non-Manufacturing, or Service, survey rose in January to 59.4 from 57.1 in December. 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 January, relative to December. This is the fifth straight month of acceleration in the overall index and makes it 14 straight months that it has been over the magic 50 level. The number came in much better than the 57.0 consensus expectation.
Breakdown by Sub-Sector
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 still the case as the Manufacturing index -- reported on Tuesday -- soared to 60.8. However, it looks like both sides of the economy are doing very well based on the ISM data. The manufacturing index was reported on Tuesday.
Seven of the sub-indexes increased and three 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 were all positive.
The most important measure of current business activity is, well, the business activity sub-index. It rose 1.7 points this month, reaching the very robust level of 64.6. Ten industries reported higher business activity and just three reported a slowdown in activity.
The most important index for the very short-term future is the backlog of orders index. That rose by 2.0 points to 50.5 -- last month it was the only sub-index below the magic-50 level, and it is very welcome to be back in the fold. There were seven industries reporting an increase in backlog, and four with a decline.
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 3.5 points to 64.9. The sharp rise in both the activity index, and the new orders index certainly mitigates the decline in the current backlog. There were 13 industries reporting higher new orders and four reporting declines.
It thus appears that business activity is picking up, and that the activity will be sustainable since they are getting enough new orders that their order backlog is growing, not just being consumed by the current high activity.
The employment sub-index is also very important. The 1.9 point increase is encouraging, as it rose to 54.5. That is still well below the manufacturing employment sub-index level of 61.7.
In yesterday's ADP report, though, the vast bulk of the job creation appeared to be coming from the service side, not manufacturing. Manufacturing only accounted for 19,000 of the 187,000 total jobs added according to ADP. Then again, there is a much smaller base of manufacturing jobs, just 10.7% of the total, and the ADP numbers imply they were 10.2% of the total increase in January, so perhaps I'm making too much of the discrepancy.
However, just six industries reported an increase in payrolls and eight reported a decline. I suppose it will be up to the BLS report on Friday to “break the tie.”
Good - Nearly Great - Report
Overall, this was a good, bordering on great, report. It is highly unlikely that the economy will slip back into a double-dip recession if the ISM Service and Manufacturing indexes are both not only above the 50 mark, but one above 60 and the other knocking on the door.
As the report was above expectations, the stock market should like it. The acceleration in growth is very welcome. The business activity index is at its highest level since December 2004. The new orders index at its highest level since January of 2004. The employment sub-index is at its highest level since May of 2006.
The non-manufacturing index does not have the same sort of long history as does the manufacturing index, but the level of the ISM manufacturing index is consistent with an economic boom in the making. Paul Krugman (from this article) produced this graph between the quarterly average of the manufacturing PMI and the rate of economic growth (the PMI manufacturing data goes way back, so those quarters of 15%+ economic growth are actually from the 1930's).
While the fit is far from perfect, it is pretty solid. Plugging the numbers in the regression would predict economic growth of 6.26% in the first quarter if the PMI were to hold where it is for February and March. While I'm not sure that the data from the 30's and 40's that went into that calculation is still relevant, so I would not want to base my economic forecast only on the PMI data. Still, it is very strong, and it looks like it is being confirmed by the non manufacturing data as well.
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.
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Breakdown by Sub-Sector
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 still the case as the Manufacturing index -- reported on Tuesday -- soared to 60.8. However, it looks like both sides of the economy are doing very well based on the ISM data. The manufacturing index was reported on Tuesday.
Seven of the sub-indexes increased and three 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 were all positive.
The most important measure of current business activity is, well, the business activity sub-index. It rose 1.7 points this month, reaching the very robust level of 64.6. Ten industries reported higher business activity and just three reported a slowdown in activity.
The most important index for the very short-term future is the backlog of orders index. That rose by 2.0 points to 50.5 -- last month it was the only sub-index below the magic-50 level, and it is very welcome to be back in the fold. There were seven industries reporting an increase in backlog, and four with a decline.
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 3.5 points to 64.9. The sharp rise in both the activity index, and the new orders index certainly mitigates the decline in the current backlog. There were 13 industries reporting higher new orders and four reporting declines.
It thus appears that business activity is picking up, and that the activity will be sustainable since they are getting enough new orders that their order backlog is growing, not just being consumed by the current high activity.
The employment sub-index is also very important. The 1.9 point increase is encouraging, as it rose to 54.5. That is still well below the manufacturing employment sub-index level of 61.7.
In yesterday's ADP report, though, the vast bulk of the job creation appeared to be coming from the service side, not manufacturing. Manufacturing only accounted for 19,000 of the 187,000 total jobs added according to ADP. Then again, there is a much smaller base of manufacturing jobs, just 10.7% of the total, and the ADP numbers imply they were 10.2% of the total increase in January, so perhaps I'm making too much of the discrepancy.
However, just six industries reported an increase in payrolls and eight reported a decline. I suppose it will be up to the BLS report on Friday to “break the tie.”
Good - Nearly Great - Report
Overall, this was a good, bordering on great, report. It is highly unlikely that the economy will slip back into a double-dip recession if the ISM Service and Manufacturing indexes are both not only above the 50 mark, but one above 60 and the other knocking on the door.
As the report was above expectations, the stock market should like it. The acceleration in growth is very welcome. The business activity index is at its highest level since December 2004. The new orders index at its highest level since January of 2004. The employment sub-index is at its highest level since May of 2006.
The non-manufacturing index does not have the same sort of long history as does the manufacturing index, but the level of the ISM manufacturing index is consistent with an economic boom in the making. Paul Krugman (from this article) produced this graph between the quarterly average of the manufacturing PMI and the rate of economic growth (the PMI manufacturing data goes way back, so those quarters of 15%+ economic growth are actually from the 1930's).
While the fit is far from perfect, it is pretty solid. Plugging the numbers in the regression would predict economic growth of 6.26% in the first quarter if the PMI were to hold where it is for February and March. While I'm not sure that the data from the 30's and 40's that went into that calculation is still relevant, so I would not want to base my economic forecast only on the PMI data. Still, it is very strong, and it looks like it is being confirmed by the non manufacturing data as well.
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.
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Zacks Investment Research
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