US: ISM Non-Mfg Index

Wed Feb 04 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Composite Index - Level 56.5 54.5 to 57.5 56.7 56.2 56.5

Growth in ISM's non-manufacturing sample held steady and solid, at 56.7 in January vs a revised 56.5 in December. This index peaked in August last year at 59.6 and has averaged 57.2 over the past 4 months.

New orders, at 59.5, are very solid and point to sustainable and strong rates of overall growth in the months ahead. Employment, however, is a weak point in the January report, down a sharp 4.1 points to 51.6 which is the lowest rate of monthly growth since April last year. Input prices, at 45.5, are on the negative side of breakeven 50 for the second straight month and are at their sharpest rate of contraction since July 2009.

A sign of weakness in the report is lack of breadth across industries, with 8 reporting expansion in the month and 8 reporting contraction. The contraction side includes mining and also construction but the expansion is led by accommodation & food services where gains point to discretionary spending.

Though there are negatives including the slowing in employment, this report on balance is solid. The Dow is moving to opening highs following the results.

Market Consensus Before Announcement
The composite index from the ISM non-manufacturing survey at 56.2 for December slowed substantially from November's unusually strong 59.3. Details showed particular slowing in business activity, down 7.2 points to 57.2, followed by slowing in new orders, down 2.5 points to 58.9. A plus was respectable strength for employment, down only 7 tenths to 56.0. Prices paid, reflecting lower fuel costs, fell 4.9 points to 49.5 for the first sub-50 reading since September 2009.

The non-manufacturing ISM surveys more than 375 firms from numerous sectors across the United States. This index covers services, construction, mining, agriculture, forestry, and fishing and hunting. The non-manufacturing composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the non-manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation. A reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries. However, slower deliveries are a plus for the economyindicating demand is up and vendors are not able to fill orders as quickly.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM non-manufacturing survey's composite index, investors will know what the economic backdrop is for the various markets. The non-manufacturing composite index has four equally weighted components: business activity, new orders, employment, and supplier deliveries. The ISM did not begin publishing the composite index until the release for January 2008. Prior to 2008, markets focused on the business activity index. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this relatively new report goes back to 1997.