US: ISM Non-Mfg Index

Mon Oct 05 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous
Composite Index - Level 58.0 57.0 to 58.8 56.9 59.0

Understandable slowing in new orders and business activity, which have been extraordinarily strong in the two prior reports, pulled down ISM's non-manufacturing index to a still very solid 56.9 in September.

One component, however, that did not slow and which, had it been released last week, would have sent the wrong signal for the employment report is a 2.3 point jump in the employment index to 58.3. This, together with July's 59.6, are some of the strongest readings in the 18-year history of this series and a puzzle given softness in the government's payroll data.

Readings throughout this report are very strong including backlogs which have been building for four straight months and new export orders which have been rising for five months (note that foreign demand for U.S. services has proven very resilient at the same time that foreign demand for U.S. goods has been declining sharply.) The price indication in this report shows slight contraction in contrast to other surveys where price contraction is very sharp.

This report, together with the services PMI released earlier this morning, underscore the fundamental domestic-based strength of the U.S. economy.

Market Consensus Before Announcement
Growth in the ISM non-manufacturing sample is expected to edge back 1 point to a composite 58.0, which nevertheless would be a very strong rate of growth. And in sharp contrast to the services PMI report, new orders have been rising sharply and backlog orders have been growing not contracting. Note that the ISM report includes the construction and mining sectors as well as the services sector.

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.