US: ISM Non-Mfg Index

Mon Feb 05 09:00:00 CST 2018

Consensus Consensus Range Actual Previous Revised
Composite Index - Level 56.2 55.2 to 57.2 59.9 55.9 56.0

ISM non-manufacturing sample is reporting some of the very best conditions in the 20-year history of this series. The composite index rose nearly 4 points in January to 59.9 which is well beyond Econoday's high estimate. New orders are arguably more important than any composite result and the reading, at 62.7, is back at last year's peak. And employment is a special standout, up more than 5 points to a very rare plus 60 score of 61.6 which is by the far the best of the post-2008 expansion. Had this reading come out before Friday's employment report, expectations would have risen for last week's January results which in fact did prove strong.

Other details range from moderate, such as backlogs which are just barely building, to very strong growth such as input costs and business activity (which is a production measure). Further confirmation of strength comes from the breadth among industries with 15 of 18 reporting monthly growth including both mining and construction which have been very strong and explain this report's relative strength compared to Markit's services PMI where growth has been less spectacular and which excludes these two industries.

Very solid growth looks to be in store for 2018 based on the January results of small sample surveys like those of ISM and Markit. The economy ended 2017 on a strong note and appears to have carried the momentum into 2018.

Market Consensus Before Announcement
The ISM non-manufacturing index has been cooling noticeably, moving down from the 60 area in October to what was a lower-than-expected 56.0 in December (revised from an initial 55.9). But most readings were still in the mid-50s to indicate solid monthly growth including new orders at 54.2, new export orders at 56.5, and employment at 56.3. Forecasters are calling for 56.2 in January.

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.