Employment Contraction Leads ISM Non-Manufacturing Index Lower

Is the services economy slowing to a crawl like the manufacturing economy? The February 2016 Non-Manufacturing ISM Report on Business indicated that economic activity in the non-manufacturing sector grew in February for the 73rd consecutive month. That sounds great, but the reality is that the good news mostly stops there.

The non-manufacturing index came in at 53.4%, down from the prior month’s 53.5% and just a tad higher than the 53.1% consensus estimate from Bloomberg.

February’s Business Activity Index came in at 57.8%. The New Orders Index was 55.5% and showed expansion, while there was contraction in the Employment Index at 49.7%.

While this is technically growth, it is at a slightly slower rate in the non-manufacturing sector. The Business Activity Index was actually 3.9 percentage points higher than in January, but the New Orders Index was a percentage point lower.

The reading on the Employment Index was where the big surprise was seen, as it was a drop of 2.4 percentage points from January. The Institute for Supply Management said that this is the first time the employment index has contracted since February 2014.
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Other readings were seen as follows:

• The Prices Index decreased 0.9 percentage point from the January reading of 46.4 percent to 45.5 percent.
• 14 non-manufacturing industries reported growth in February.
• The majority of the respondents’ comments continue to be positive about business conditions.
• The respondents are projecting a slight optimism in regards to the overall economy.
• There is an increase in the number of industries reflecting growth in both New Orders and Business Activity.
• The NMI has decreased slightly due to the contraction in the Employment index.
• Supplier deliveries were down 1 point to 50.5.
• Inventories were up 1 point at 52.5.
• The Backlog of Orders index was flat at 52.0.
• New Export Orders was up 8 points at 53.5% and the Imports index was up 9.5 points to 55.5%.