US: ISM Non-Mfg Index

January 5, 2017 09:00 CST

Consensus Consensus Range Actual Previous
Composite Index - Level 56.8 56.0 to 57.6 57.2 57.2

Hiring is less active but new orders are unusually strong in December's ISM non-manufacturing report where the index, at 57.2, matches November as 2016's best. New orders are up 4.6 points to 61.6 to signal the strongest rate of monthly growth since the middle of last year. Business activity is also very strong, at 61.4.

But other readings show less strength. Employment is down 4.4 points to 53.8 but is still safely over breakeven 50 and is actually the third best reading of 2016. Backlog orders, however, are not above 50, at 48.0 for a 3.0 point loss that will not raise demand for new employees. And though new orders are strong, export orders slowed by 4.0 points to 53.0 and a 4-month low.

The slowing in employment will not lift expectations for strength in tomorrow's employment report but the new orders result is an important positive for the first-quarter outlook. Other details include a small rise in inventories and moderately rising pressure in input costs.

Market Consensus Before Announcement
The ISM non-manufacturing index, at 57.2 in November, has been pointing to steady and strong conditions for the bulk of the U.S. economy. New orders in November came in at 57.0 with employment showing unusual strength at 58.2. The Econoday consensus for the November composite is 56.8.

The Institute For Supply Management surveys more than 375 firms from numerous sectors across the United States for its non-manufacturing index. 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 economy -- indicating 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.