US: ISM Services Index


December 3, 2020 09:00 CST

Consensus Consensus Range Actual Previous
Index 56.0 54.0 to 56.8 55.9 56.6

Highlights
In what is a less-than-than spectacular report held back by employment, ISM's services index fell 7 tenths to 55.9 in November though very near Econoday's consensus for 56.0. Employment did improve in November but not greatly, at an index of 51.5 which is only modestly above breakeven 50 though improved from October's 50.1.

New orders were, however, very solid, at 57.2 though down from 58.8 and 61.5 in the October and September reports. Backlogs slowed more sharply, to 50.7 to show only a slight build in the month versus October's 54.4. New orders from export customers, at 50.4, also barely rose in the month, in what is an echo of this morning's PMI services report that cited the negative effects of international travel restrictions.

Other readings include a 3.2 point dip in business activity (production) though the index's level of 58.0 is still very strong. Input costs also indicate strength, rising a further 2.1 points to 66.1 while delivery times, consistent with other reports, are lengthening, up 8 tenths to 57.0.

Yet employment in this report, especially given tomorrow's November employment data from the government, takes the shine off areas of strength. And the slowing in backlogs, however much vaccine hopes point to rising demand, may well limit this sample's hiring commitment in December. Today's report leaves Econoday's consensus divergence index at 5, in the plus column but only modestly so to indicate that recent data, going into tomorrow's report, has been coming in only slightly ahead of expectations.

Market Consensus Before Announcement
ISM's services index is expected to hold in the mid-to-high 50s, at a consensus 56.0 for November versus 56.6 in October.

Definition
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.

Description
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 services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. 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 report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.