The Non-Manufacturing ISM dipped slightly from 56.5 to 55.5 but Bloomberg Econoday case spins the setup as positive, as is typically the case.
Markit chief economist Chris Williamson has a differing opinion following today’s release of Markit Services PMI.
Since the two surveys both cover the service economy, only one can be correct.
First, let’s look at the Non-Manufacturing ISM Report, then compare opinions.
Non-Manufacturing ISM Data Components
| Index | July | June | PP Change | Direction | Rate of Change | Trend in Months |
|---|---|---|---|---|---|---|
| NMI® | 55.5 | 56.5 | -1.0 | growing | Slower | 78 |
| Business Activity / Production | 59.3 | 59.5 | -0.2 | growing | Slower | 84 |
| New Orders | 60.3 | 59.9 | 0.4 | Growing | Faster | 84 |
| Employment | 51.4 | 52.7 | -1.3 | Growing | Slower | 2 |
| Supplier Deliveries | 51.0 | 54.0 | -3.0 | Slowing | Slower | 7 |
| Inventories | 54.0 | 55.5 | -1.5 | Growing | Slower | 16 |
| Prices | 51.9 | 55.5 | -3.6 | Increasing | Slower | 4 |
| Backlog of Orders | 51.0 | 47.5 | 3.5 | growing | From Contracting | 1 |
| New Export Orders | 55.5 | 53.0 | 2.5 | growing | Faster | 2 |
| Imports | 53.0 | 54.0 | -1.0 | Growing | Slower | 6 |
| Inventory Sentiment | 63.0 | 62.5 | 0.5 | Too High | Faster | 230 |
Econoday Interpretation
Highlights
Conditions, especially for orders, remain very strong for the ISM’s non-manufacturing sample. The report’s composite index did slip 1.0 point to 55.5 which is slightly below expectations but new orders rose in the month, up 4 tenths to 60.3 for the best showing since October last year. The bulk of the decline in the composite is due to a 3 point drop in delivery times which, in a signal of easing constraints in the supply chain, slowed only slightly in the month.
The other negative factor for the composite is a noticeable dip in employment, down 1.3 points to a very soft 51.4. This reading, in contrast to other advance indications, is not pointing to much strength for Friday’s employment report. But other readings are very positive including business activity at 59.3, export orders at 55.5, and total backlog orders at 51.0 for a 4.5 point gain.
The order strength in this report points to early third-quarter acceleration for the bulk of the U.S. economy.
Markit U.S. Services PMI™
Key Findings
- Business activity rises for the fifth consecutive month, faster than flash estimate
- Growth of new work edges up to its fastest so far in 2016
- Business confidence rebounds from June’s survey-record low
The seasonally adjusted Markit final U.S. Services PMI™ Business Activity Index1 registered 51.4 in July (earlier ‘flash’ estimate: 50.9), which was unchanged from the figure recorded in June and above the neutral 50.0 threshold for the fifth consecutive month. However, the latest reading remained indicative of only a very modest expansion of business activity that was softer than the post-crisis trend (55.4).
July data suggested that growth in the U.S. service sector remained muted, with activity rising at the weakest pace in the current five-month sequence of expansion. A slower increase in new business was also recorded. On a more positive note, the rate of job creation picked up slightly and business sentiment improved markedly from June’s record low. On the price front, slower increases were registered for both input costs and output prices during the month.
Comments From Markit Chief Economist Chris Williamson
- “Those looking for signs of the US economy moving up a gear in the third quarter will be disappointed by the PMI readings for July. The surveys are indicating that the pace of economic growth has held at around 1% at the start of the third quarter, largely unchanged on the signals sent by PMIs for the first and second quarters.”
- “Once again, there’s better news on hiring, with the overall rate of job creation edging up to the highest since January. The surveys are broadly consistent with non-farm payrolls rising by 160,000 in July.”
- “Hiring is holding up in part because of signs that the soft patch that the economy has gone through may prove temporary. Inflows of new business
across the economy rose at the fastest rate seen so far this year in July, and backlogs of work were pushed higher for the first time since last October
as a result.” - “Business confidence about the outlook is also improving, rising in the service sector to the highest since January.”
- “These survey results add to the sense that policy makers will be encouraged by the resilience of the labour market in particular, but will want to see signs of stronger economic growth before hiking interest rates again. Another rate hike by the end of the year therefore still looks a strong possibility, though with odds of the timing of that hike skewed heavily towards December.”
ISM vs. PMI Short Synopsis
- Chris Williamson: The surveys indicate that the “pace of economic growth has held at around 1% at the start of the third quarter.”
- Econoday: “The order strength in this report points to early third-quarter acceleration for the bulk of the U.S. economy.“
Mish Comments
Given that Chris Williamson has a far better track record than Bloomberg Econoday, a 1% GDP estimate for third quarter seems reasonable, for now.
I have no faith at all in look-ahead business confidence. For years on end business confidence has been a contrarian indicator.
As for labor, Markit is more positive than Econoday. From my perspective, we had a perhaps temporary crash followed by a strong rebound.
For now, a reasonable thing to do is average the last two months (287,000 + 11,000). The average is 149,000 per month, and below prior trends.
Moreover, the Household Survey has been weak for three consecutive months. Unless and until the Household Survey jumps up to match the rebound in the establishment survey, I will be skeptical of the presumed strength of the labor market.
On Friday, we will have more clues when the BLS posts jobs numbers for July.
For details on the divergence between the Household Report and the Establishment Survey, please see Jobs +287,000 Employment +67,000 (Third Anemic Household Report).
For discussion of PMI divergences in Asia, please see Tale of Diverging China PMI Reports.
Mike “Mish” Shedlock
