Tuesday, July 6, 2010

ISM: service sector still growing


The June ISM surveys revealed a modest deterioration in the health of the service sector, with the result that 58.1% of service sector companies, rather than 61.1% in May, reported improving business activity. But as this chart shows, month-to-month fluctuations like this are to be expected—they are almost the rule, not the exception. The important thing is that the level of the index is sharply higher than it was just six months ago, and it is showing that a clear majority of businesses see conditions improving. There is nothing in this index that would point to a double-dip recession.

P.S. The correlation of this index, which I have traditionally followed, to the more frequently cited Service Sector Composite Index is 0.97. Both show almost exactly the same pattern.

10 comments:

Dr William J McKibbin said...

My data is showing that private services are leading US exports in growth. Although private service exports fill a relatively small proportion of US total exports, the growth remains impressive nonetheless. More at:

http://wjmc.blogspot.com/2010/07/us-private-service-exports-on-rise.html

Thank you for the opportunity to comment...

brodero said...

5 month moving average of Business Activity is now above 58....which corresponds well with
150 to 200,000 private payroll growth....

Jeff said...

Scott:

I know your view on this....but when I here folks over the weekend stating the Dow trading pattern is looking similar to the 1930's where we experience an extreme upturn over the initial downturn and then turned down again...how do you view this. My thought is that our economy and financial system is much different than in the 30's, but yet the similarities are also there. I am working hard to stay positive and view this 16% correction as a pause, but it is really getting hard. Not sure if you read the NYT's article by Robert Prechter which stated we are going below 1000 on the DOW and are definitely going to repeat our Great Depression (his views are similar to the Elliott Wave theory). Also Daryl Gupy also believes the Dow is setting up in a Great Depression pattern. Your thoughts on these 2 opinions?

Scott Grannis said...

brodero: thanks, that is indeed a nice fit, and it squares with the observation that the ISM indices do a pretty good job of tracking growth in the overall economy. The manufacturing index is pointing to 4-5% GDP growth for example. Lots of things are pointing to growth that is much stronger than the market seems to be expecting, and that's quite bullish.

Scott Grannis said...

Jeff: drawing parallels between now and the 1930s is a very risky proposition. So many things are different, starting with the fact that the Fed is doing the exact opposite today of what it did back then: they are working hard to expand the money supply today whereas they tightened supply back then. There are parallels between Obama's expansive government policies and FDR, but the pushback now is much greater than it was back then.

In any event, I am just amazed at the huge number of bearish forecasts that are making the rounds, and the apparently widely held belief that we are headed for a double-dip recession, when I don't see any signs of that being the case.

Mark Gerber said...

Scott,
What's your opinion of the ECRI leading economic indicators? They have turned decidedly downward, and I'm hearing lots of pros reference it as leading ISM data.
Thanks,
Mark

Scott Grannis said...

Mark: I think it's premature to use the ECRI WLI to predict a recession, and I think the folks at ECRI agree. All of the indicators I watch continue to say we are in the early stages of a recovery, and pretty typically so. The only thing that stands out is that this recovery is pretty mild given the depths of the preceding recession.

Benjamin said...

Dr. McKiiben: Then we need a cheap dollar.

I never understood the idea that the dollar should be expensive. Crimps exports, hurts domestic growth. Discourages foreign investment in US assets.

The economy seems to be faltering now. Need aggressive actions by the Fed. Qualitative easing, the creation of money ex nihilo is needed. This is a chance for monetarists to show they can be a force for good, not just fear-mongering.

More fiscal stimulus is probably just more money and debt wasted, especially if it flows into our parasitical military sector.

John said...

Jeff,

Scott's everyday body of work is one of the best ways I know to keep things in perspective. Markets can and do disconnect from economic fundamentals for periods of time but ultimately will respond to them. The data are clearly pointing to economic expansion.

It also helps to keep in mind that there are many agendas at work and the media panders to nearly all of them. If you listen you will hear it all. Every crazy theory in the world will have its proponents in front of a camera or in the business journals and newspapers. In my experience these are most prevalent near market lows when pessimism is high.

There is a lot of data that is pointing to growth. Focus on that and turn off the TV. Things are rarely as bad as the cassandras want you to think.

Bob said...

Elliot wave, shmelliot wave. They've got enough indicators and waves within waves to explain the second coming. Prechtor is the proverbial broken clock IMO.