ISM Services Index Declines at Slowest Pace in 11 Months

A closely-watched index of the services industry suggests that conditions continued to deteriorate in August, as expected, but that improvement may only be a month or two off. Overall, 6 of the 12 industries surveyed reported growth.

The ISM non-manufacturing index of services, finance, and construction moved up two points to 48.4 in August, led my month-to-month improvements in production, new orders, and employment. Results above 50 indicate growth, so summer ends with the services sector nearly on the cusp of growth.

“The report confirms that the economy is slowly emerging from the worst recession in seven decades,” said Sal Guatieri from BMO. “However, outside of housing, there is precious little to suggest that underlying consumer demand is picking itself off the mat.”  

The jobs component, which is being closely watched as the official employment numbers come out tomorrow, was at least heading in the right direction as it climbed 2 points, but with a score of 43.5, the index still points towards significant downsizing in the service sector. 

“So far this recovery is showing all the hallmarks of being ‘jobless,’ Guatieri added. “Our best estimate for August nonfarm payrolls is now in line with July’s figure of -247,000.”

Still, the headline index is now at its highest since September last year. The production/business activity component jumped 5.2 points to 51.3, the first marker of growth in 11 months, while new orders inched towards stability with a 49.9 score.

“These data are positive but not particularly impressive and certainly pales in comparison to the gains made in the ISM manufacturing index earlier this week,” said Charmaine Buskas from TD, referencing the 52.9 score in this survey’s cousin index. “Nonetheless, it is clear that improvements are being recorded in most sectors of the U.S.”

One trend that was similar to the ISM manufacturing index was soaring prices. In the services index costs climbed a whopping 21.8 points to 63.1 in August, while in Tuesday’s manufacturing index prices were hiked up 10 points to 65.0. 

Whether those costs were passed on to the consumer won’t be seen until the CPI index is released on Sept. 16. Here is a look at the rest of the categories…

Here's what report respondents had are saying….

• “While there are promising signs in the economy pointing toward the beginnings of a recovery, the financial services industry continues to be significantly affected by the downturn. Expectations are that the pace will begin to change by Q4 '09.” (Finance & Insurance)
• “Business is still soft due to overall economic conditions.” (Wholesale Trade)
• “There seems to be a more positive feeling about the economy.” (Educational Services)
• “Healthcare reform still has hospitals wondering how they are going to get paid at the end of the day.” (Health Care & Social Assistance)
• “Occupancy shows continued strength for the summer season, still below previous years' averages by 15% to 25%.” (Accommodation & Food Services)
• “Business steady — revenue down slightly; however, less than expected.” (Arts, Entertainment & Recreation)
• “Good first half results. Some evidence of consumers 'trading down.' Supplier lead times are very short.” (Agriculture, Forestry, Fishing & Hunting)

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