ISM Non-Manufacturing Business Report: Slightly Faster Growth

by: Doug Short

Tuesday the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 56 percent, signaling slightly faster growth than last month's 55.2 percent. The consensus was for 55.4 percent, but the's own estimate was spot on at 56 percent.

Here is the report summary:

The NMI™ registered 56 percent in February, 0.8 percentage point higher than the 55.2 percent registered in January. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. This month's reading also reflects the highest NMI™ since February 2012, when the index registered 56.1 percent. The Non-Manufacturing Business Activity Index registered 56.9 percent, which is 0.5 percentage point higher than the 56.4 percent reported in January, reflecting growth for the 43rd consecutive month. The New Orders Index increased by 3.8 percentage points to 58.2 percent, and the Employment Index decreased 0.3 percentage point to 57.2 percent, indicating growth in employment for the seventh consecutive month. The Prices Index increased 3.7 percentage points to 61.7 percent, indicating prices increased at a faster rate in February when compared to January. According to the NMI™, 13 non-manufacturing industries reported growth in February. The majority of respondents' comments reflect a growing optimism about the trend of the economy and overall business conditions.

Like its much older kin, the ISM Manufacturing Series, I have been reluctant to focus on this collection of diffusion indexes. For one thing, there is relatively little history for ISM's Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. I also agree with the view expressed at's Big Picture comment.

The market generally doesn't pay much attention to the services index because the service sector is less cyclical than the manufacturing sector. During the recession, the service index held steady around 50.0% through September 2009 before bottoming at 37.4% in November 2008. Since then, the service index has slowly risen back and finally broke the 50.0% barrier. In contrast, the manufacturing index, with the exception of January 2009, stayed below 50% from December 2008 through July 2009 and bottomed at 32.9% in December 2008.

The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

The more interesting and, I would argue, useful subcomponent is the Non-Manufacturing Business Activity Index.

For a diffusion index, the latest reading indicates growth at a slightly faster rate than last month. But this can be an extremely volatile indicator. Thus I've added a six-month moving average to assist us in visualizing trends.

Theoretically, I believe, this indicator will become more useful as the timeframe of its coverage expands. Manufacturing may be a more sensitive barometer than Non-Manufacturing activity, but we are increasingly a services-oriented economy, which supports my plan to keep this series on the radar.

Here is a link to my coverage of ISM Manufacturing report released a few days ago.

Note: I use the FRED USRECP series (Peak through the Period preceding the Trough) to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The USRECP series thus flags December 2007 as the start of the recession and May 2009 as the last month of the recession, giving us the 18-month duration. The dot for the last recession in the charts above are thus for November 2007. the "Peak through the Period preceding the Trough" series is the one FRED uses in its monthly charts, as illustrated here.