ISM Service Index Surprisingly Strong - Real Time Insight

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The Institute for Supply Management's ( ISM ) Non-Manufacturing or Service Index increased to 57.3 from 56.8 in January.  That was significantly above the consensus expectations which were looking for a drop to 56.0.  It was also the highest level of the index in a year.   It is also in stark contrast to the ISM Manufacturing Index (released last week) which unexpectedly fell to 52.4 from 54.1.  Both indexes are "magic 50" indexes where any reading above 50 means expansion and anything below means contraction.  Thus the service sector of the economy is showing robust growth, and that growth accelerated in February versus January, while the manufacturing side of the economy is expanding at a slower pace, and that pace of growth is slowing down.

 

The Service index is made up of ten sub-indexes, six of which increased this month and four decreased.  Nine of the ten are above the magic 50 level.  There are four of the sub-indexes that I consider to be particularly significant, all of which are comfortably above the 50 level and three of which increased this month. 


 

The best measure of overall business activity in February is the Business activity index.  It rose to a very robust 62.6, a gain of 3.1 points.  As business complete projects, it comes out of their backlog, which is the best indicator of activity in the near term future.  The Order Backlog sub index increased 3.5 points to 53.0.  As the backlog is worked down it has to be replenished with new orders.  The new orders index thus gives s a good glimpse of future business activity.  It increased 1.8 points on the month to 61.2. 

 

While employment has been growing, the unemployment rate still remains at a very high 8.3%.  Thus the Employment sub index takes on a special importance.  It was the only one of the four key sub-indexes to fall, dropping 1.7 points but to a still strong 55.7.

 

This was a very positive report.  While the Service Index does not have the long history that the Manufacturing Index has, it covers a much larger part of the economy.  This report is key evidence that the economy is on the right track.

 


 
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