ISM Non-Manufacturing: Slower Growth in December

January 6, 2015

by Doug Short

Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 56.2 percent, down from last month's 59.3 percent. Today's number came in below the Investing.com forecast of 58.0.

Here is the report summary:

"The NMI® registered 56.2 percent in December, 3.1 percentage points lower than the November reading of 59.3 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.2 percent, which is 7.2 percentage points lower than the November reading of 64.4 percent, reflecting growth for the 65th consecutive month at a slower rate. The New Orders Index registered 58.9 percent, 2.5 percentage points lower than the reading of 61.4 percent registered in November. The Employment Index decreased 0.7 percentage point to 56 percent from the November reading of 56.7 percent and indicates growth for the tenth consecutive month. The Prices Index decreased 4.9 percentage points from the November reading of 54.4 percent to 49.5 percent, indicating prices contracted in December when compared to November. According to the NMI®, 12 non-manufacturing industries reported growth in December. Comments from respondents are mostly positive about business conditions and the overall economy for year-end."

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 57.2 percent is a substantial 7.2 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 three-month moving average to assist us in visualizing the short-term trends.

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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