US: ISM Non-Mfg Index

Wed Mar 04 09:00:00 CST 2015

Consensus Consensus Range Actual Previous
Composite Index - Level 56.5 55.0 to 57.5 56.9 56.7

Growth remains very solid in ISM's non-manufacturing sample where the composite index is up 2 tenths to 56.9 in the February report. Employment is a stand-out positive, jumping nearly 5 points to a 4-month high of 56.4.

Not so strong are new orders where growth is down nearly 3 points to 56.7 for the lowest reading since March last year. Nevertheless, this is still a very healthy and sustainable rate of growth.

Supplier deliveries slowed further in February which added to the composite for the month. But the slowing is likely tied, not to demand factors, but to the port slowdown on the West Coast, a slowdown which has since been resolved. The slowing in deliveries is the likely reason behind a rise in inventories and a build in backlog orders. Cost pressures, as they are in most reports, are flat, the result of course of low fuel costs.

A big plus in today's report is wide breadth of strength with 14 of 18 industries reporting growth in the month led once again by accommodation & food services which are likely getting a boost from discretionary consumer spending, itself the result of the strong jobs market and low gasoline prices. In the contraction column are both construction and mining, two sectors that remain weak.

Market Consensus Before Announcement
The composite index from the ISM non-manufacturing survey held steady and solid, at 56.7 in January versus 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, were very solid and point to sustainable and strong rates of overall growth in the months ahead. Employment, however, was a weak point in the January report, down a sharp 4.1 points to 51.6 which was the lowest rate of monthly growth since April last year. Input prices, at 45.5, were on the negative side of breakeven 50 for the second straight month and are at their sharpest rate of contraction since July 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.