ISM Non-Manufacturing: Slower Growth in October

November 5, 2014

by Doug Short

Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 57.1 percent, down from last month's 58.6 percent. Today's number came in below the forecast of 58.0.

Here is the report summary:

"The NMI® registered 57.1 percent in October, 1.5 percentage points lower than the September reading of 58.6 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 60 percent, which is 2.9 percentage points lower than the September reading of 62.9 percent, reflecting growth for the 63rd consecutive month at a slower rate. The New Orders Index registered 59.1 percent, 1.9 percentage points lower than the reading of 61 percent registered in September. The Employment Index increased 1.1 percentage points to 59.6 percent from the September reading of 58.5 percent and indicates growth for the eighth consecutive month. The Prices Index decreased 3.1 percentage points from the September reading of 55.2 percent to 52.1 percent, indicating prices increased at a slower rate in October when compared to September. According to the NMI®, 16 non-manufacturing industries reported growth in October. The majority of the respondents’ comments reflect favorable business conditions; however, there is an indication that there continues to be a leveling off from the strong rate of growth of the preceding months."

Like its much older kin, the ISM Manufacturing Series, I have been reluctant to focus on this collection of diffusion indexes. For one thing, there is relatively little history for ISM's Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

In my view, the more interesting and useful subcomponent is the Non-Manufacturing Business Activity Index. The latest data point at 60.0 percent is a 2.9 decline from the previous month.

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For a diffusion index, this can be an extremely volatile indicator. Thus I've added a six-month moving average to assist us in visualizing the trend, which has been relatively range bound for the past two years, and we're currently at the bottom of the range.

Theoretically, I believe, this indicator will become more useful as the timeframe of its coverage expands. Manufacturing may be a more sensitive barometer than Non-Manufacturing activity, but we are increasingly a services-oriented economy, which explains my intention to keep this series on the radar.

Here is a table showing trend in the underlying components.

Here is a link to my coverage of the latest ISM Manufacturing report.

Note : I use the FRED USRECP series (Peak through the Period preceding the Trough) to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The USRECP series thus flags December 2007 as the start of the recession and May 2009 as the last month of the recession, giving us the 18-month duration. The dot for the last recession in the charts above are thus for November 2007. The "Peak through the Period preceding the Trough" series is the one FRED uses in its monthly charts, as illustrated here.

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