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03 03 2016 | by Victor Xing | Economics

February ISM: services cool as manufacturing stabilize

February ISM – a tale of two indices

The February ISM manufacturing and non-manufacturing surveys suggest a narrowing of recent divergence between manufacturing and services sectors.

Manufacturing sector showing signs of stabilization

The ISM manufacturing index beat expectations at 49.5 vs. 48.5 consensus with a rise in employment and prices.  These nascent signs of stabilization is encouraging, given the sector had long been battered by the effects of dollar appreciation (soft demand for U.S. exports) and cut-backs from the commodity rout.

Details of the February ISM manufacturing index:

  • ISM manufacturing PMI (aggregate index) at 49.5 vs. 48.5 survey and 48.2 prior
  • New orders at 51.5, unchanged vs. prior
  • New export orders at 46.5 vs. 47.0 prior
  • Prices at 38.5 vs. 33.5 prior
  • Employment at 48.5 vs. 45.9 prior
February ISM
ISM Manufacturing beat expectations with signs of stabilization and a rise in employment

Worrying trend of slower services sector employment growth

Unfortunately, the latest ISM non-manufacturing index revealed further signs of slowdown in the services sector – a long-time bulwark against global disinflationary pressure and tepid foreign growth.  This is important because services sector dominate U.S. economic activities.  Despite the aggregate index came in at 53.4 vs. 53.1 survey, the highly watched employment sub-index came in at 49.7 vs. 52.1 prior – marking it the second times that the sub-index has dipped into contraction territory since Dec 2011 (the other time being February 2014, when weather-related distortions decimated U.S. economic data).  To make it more disconcerting, services sector employment has been on a downward trajectory since October of last year.

Details of the February ISM non-manufacturing index:

  • ISM non-manufacturing index at 53.4 vs. 53.1 consensus and 53.5 prior
  • Business activity index at 57.8 vs. 53.9 prior
  • New orders at 55.5 vs. 56.5 prior
  • Prices at 45.5 vs. 46.4 prior
  • Employment at 49.7 vs. 52.1 prior
February ISM - slowdown in services sector employment
ISM non-manufacturing index beat expectations in February, but the underlying sub-indices showed further decline in employment growth

Policy implications

Indeed, concerns over the services sector is now being shared by an influential policymakers at the Federal Reserve.  New York Fed President Dudley highlighted the ISM non-manufacturing index in his speech on Monday:

The latest ISM non-manufacturing index suggests the possibility of a slower pace of growth also in the services sector, which has been relatively robust. Consumer spending growth—which had been a brighter spot for most of 2015—also slowed notably in the fourth quarter

This marked a rare occasion where services sector economy was portrayed as a concern, rather than the usual beacon of light against the backdrop of soft global growth and manufacturing slowdown.

Next article02 29 2016 | by Victor Xing | Central Banks

President Dudley’s speech at the PBOC-FRBNY symposium