US: ISM Non-Mfg Index

Tue Apr 05 09:00:00 CDT 2016

Consensus Consensus Range Actual Previous
Composite Index - Level 54.0 52.9 to 55.2 54.5 53.4

The ISM non-manufacturing index rose a sharp 1.1 points in March to a 54.5 level that points to solid economic growth for the great bulk of the nation's economy. New orders are very solid at 56.7 for what is their strongest rate of monthly growth so far this year. Backlog orders, at 52.0, show plus-50 monthly expansion for a third month in a row.

And strength in backlogs is a particularly good sign for employment which, however, has been flat in this report, at 50.3 in the March report for however a 6 tenths gain. Output is especially strong as the business activity index, at 59.8, is showing its best rate of growth in 5 months which points to acceleration for the overall economy. In perhaps an early sign of the positive effects of the lower dollar, the new export orders index is up a very sharp 5 points to 58.5 in what follows a 7 point surge in February.

This report is very positive and contrasts sharply with the very soft services report released earlier this morning from Markit Economics. And the contrast isn't due to the extra components in the ISM report -- construction and mining -- which are mixed in the month with construction up in the ISM data and mining down. This report is closely watched and optimists can point with confidence to its indications of strength.

Market Consensus Before Announcement
Slowing steadily for seven months, the ISM non-manufacturing index correctly signaled the second-half dip in GDP and may now be signaling disappointing growth for the first quarter. But components for new orders and backlogs have continued to show strength and forecasters see a bounce for the index in March, to a consensus 54.0 for March vs 53.4 in February.

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.