The Institute for Supply Management’s Non-Manufacturing, or Service, survey plunged in April to 52.8 from 57.3 in March. That is the lowest reading since last August. Like its venerable brother, the Manufacturing survey, this is a “magic 50” index where any reading above 50 indicates that the economy is expanding and anything below 50 represents an economic contraction. Thus, this means that the Service side of the economy, which is far larger than the manufacturing side, is still growing, but the rate of growth decelerated in April, relative to March.
This makes it 17 straight months that it has been over the magic 50 level. While the level is still showing an expansion, the number came in far below than the 57.4 consensus expectation, and is thus a big disappointment.
Like the manufacturing survey, this index is made up of ten sub-indexes that roughly correspond to the manufacturing sub indexes. In this recovery, the manufacturing side of the economy has been stronger than the service side. That is still the case, as the Manufacturing index (released on Monday) slipped to 60.4, from 61.2, a better than expected report. Any reading over 60 is extremely strong.
The slippage on the Service side is a bit disconcerting, but the Manufacturing side is consistent with absolutely boom-like conditions. Unfortunately, manufacturing is a relatively small part of the overall economy at this point.
Breakdown by Sub-Index
Seven of the sub-indexes fell and just two increased on the service side this month. One was unchanged. All are above the magic-50 level. The performance of the more important sub-indexes were mostly negative (well, weak relative to March).
The most important measure of current business activity is, well, the business activity sub-index. It plunged 6.0 points this month, but remains at an OK level of 53.7. Seventeen industries reported higher business activity and just one reported a slowdown in activity. The business activity is subject to seasonal adjustment, and that appears to have exacerbated the decline, on a not-seasonally-adjusted basis, the index fell to 61.0 from 63.5.
The most important index for the very short-term future is the backlog of orders index. That edged down by 0.5 points to 55.5. There were eight industries reporting an increase in backlog, and four with a decline.
As businesses work off their existing backlog of orders, they need to replace them with new orders. There the news is not good, with a drop of 11.4 points to 52.7. That still indicates that new orders are rising, but an anemic clip and a very sharp slowdown from the flood of new orders last month. There were 12 industries reporting higher new orders and four reporting a decline.
The employment sub-index is also very important, especially with unemployment still running at 8.8%. The 1.8 point decline is disappointing, as it fell to 51.9. That is still well below the manufacturing employment sub-index level of 62.7, which fell 0.3 points, but remaining in the boom time zone.
End Result, Overall
Twelve service industries reported higher employment while five reported trimming payrolls. In today’s ADP report, though, the vast bulk of the job creation appeared to be coming from the Service side, not Manufacturing. Manufacturing only accounted for 25,000 of the 179,000 private sector jobs added, while services added 138,000.
Then again, there is a much smaller base of manufacturing jobs, just 10.7% of the total. The employment sub-index has been above the magic-50 level for eight straight months now. The employment index is also subject to seasonal adjustment, but the effect was not as big as for the business activity index.
On an unadjusted basis it rose to 57.5 from 54.5. One thing to keep in mind is that these are diffusion indexes (the reading is the number of positive responses, plus one half of negative responses). As such they measure the number of companies that are adding or trimming jobs, not the number of jobs they are creating or losing. Thus it is not exactly an apples-to-apples comparison.
Still, over time, the ISM employment indexes, both manufacturing and non-manufacturing, have tended to track employment well. The graph below shows the history of the key sub-indexes. It shows the declines in the Business Activity and New Orders indexes to be unusually severe, but the levels to be about normal. Reason for concern, but not for panic.
Very Disappointing Report
Overall, this was very disappointing report. It was far below expectations and the drop in the composite index is the largest in a very long time. However, the overall level is still OK, pointing to expansion, but a pretty weak expansion. It is highly unlikely that the economy will slip back into a double-dip recession if the ISM service index, and the manufacturing index are both above the 50 mark.
As the report was far below expectations, the stock market should not like it. The deceleration in growth is not welcome. The business activity index in particular dropped very sharply, but it was at a very high level last month, and at a near record in February.
The decline comes on top of a big drop last month, and the two month decline of 13.2 points is pretty scary. Even though it looks like seasonal adjustment was a big part of the drop, it is not at all what we want to see. As I said, this is a reason for concern, not panic. However, if we have another drop anything like it next month, then some panic might be appropriate.
The table below comes from the ISM report and shows the sub-indexes for the service index, as well as the corresponding sub-indexes on the manufacturing side.
* Non-Manufacturing ISM Report On Business
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