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ISM Services Head South Following Manufacturing

Posted by Joseph Trevisani on Oct 5, 2015 2:21:00 PM

Growth in services, the largest section of the U.S economy eased from the best level in a decade and forward measures hint that further slippage may lie ahead for the world's largest economy. 

The Institute of Supply Management’s non-manufacturing index fell to 56.9 in September from 59.0 in August. Economists had anticipated a slightly smaller drop to 57.5. July's 60.3 reading had been the most optimistic reading for this business survey in almost ten years. With this decline the September outlook is now below both the 58.9 average for this year and 58.8 for 2014.  

New service orders took an even bigger hit in September, falling to 56.7, from 63.4. This equaled February’s low and this is the weakest for this indicator since March 2014. The 6.7 plunge in the new business index was the largest single month decline since November 2008 in the midst of the financial crash.

Prior to September, service sector demand which is largely of domestic origin, had stayed buoyant even as manufacturing business ebbed. 

Last week the overall ISM manufacturing index plunged to 50.2 in September from 51.1 prior, just above the 50 division between expanding economic expansion and contraction.

New orders in the manufacturing sector fell to 50.1 in September, the lowest since November 2012 from 51.7 in August. Business for U.S factories have been damaged by the economic slowdown in many overseas markets and the rising cost of U.S. goods from a stronger dollar.

Demand in the service sector, the approximately 70 percent of the U.S. economic activity due to household consumption, had maintained a modest level of expansion despite equity market turmoil over the last two months and stagnant wages.

In September average hourly earnings rose just 2.2 percent on the year, barely ahead of inflation.  

Consumer attitudes have been supported this year by a relatively healthy job market.

But job creation faltered in August and September. The 139,000 payroll average for those two months is well below the 198,000 average this year and the 260,000 print in 2014.

Employment is normally a trailing indicator and it remains to be seen if diminishing job prospects will yet affect consumer optimism. 

Even service sector job growth which is normally better shielded from global weakness because of its largely domestic demand base, has shifted into a lower gear. Payroll additions have declined for four straight months, the longest such streak since 2001.

The ISM business activity index for services, which parallels the ISM’s factory production gauge, declined to 60.2 last month from 63.9 in August. The factory measure dropped to 51.8 in September, the lowest since May 2013, from 53.6. Service employment rose slightly to 58.3 from 56.0 while manufacturing employment decreased to 50.5 from 51.2.

The measure for prices paid in services decreased to 48.4 in September from 50.8. Last month’s score was the second-lowest price reading since July 2009, an indication that disinflationary pressures imported from overseas remain strong in the economy.

The factory price index slipped 1.0 to 38.0 in September, which, despite the steep drop from 59.5 a year ago, was only the fourth lowest level since the financial crash, a measure of the long term deflationary pressures extant in the manufacturing sector from foreign competition.  

Analysts will be watching retail sales for September on October 14th for an indication if the weakening job numbers and stagnant wages have begun to affect U.S. consumption. Sales are predicted to have gained 0.2 percent in September, as they did in August. Annual sales were 2. 2 percent higher in August, about half their historical average.  Retails sales are not adjusted for inflation. 

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

ism service oct 5

service new orders oct 5
mfg new orders oct 5ism and recession oct 5

 

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