ISM Non-Manufacturing: Somewhat Slower Growth in September

October 3, 2014

by Doug Short

Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 58.6 percent, down from last month's 59.6 percent, which was a record high for this relatively new indicator that only dates back to January 2008, the second month of the Great Recession. Today's number came in a tick above the forecast of 58.5.

Here is the report summary:

"The NMI® registered 58.6 percent in September, 1 percentage point lower than the August reading of 59.6 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 62.9 percent, which is 2.1 percentage points lower than the August reading of 65 percent, reflecting growth for the 62nd consecutive month at a slower rate. The New Orders Index registered 61 percent, 2.8 percentage points lower than the reading of 63.8 percent registered in August. The Employment Index increased 1.4 percentage points to 58.5 percent from the August reading of 57.1 percent and indicates growth for the seventh consecutive month. The Prices Index decreased 2.5 percentage points from the August reading of 57.7 percent to 55.2 percent, indicating prices increased at a slower rate in September when compared to August. According to the NMI®, 12 non-manufacturing industries reported growth in September. Respondents’ comments indicate that business seems to be leveling off and there is a slight slowing in the momentum of the past few months of strong growth. They continue to remain optimistic about business conditions and the overall direction of the economy."

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 62.9 percent is a 2.1 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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