ISM Non-Manufacturing: Continued Contraction in May

The Institute of Supply Management (ISM) has now released the May Non-Manufacturing Purchasing Managers' Index (PMI), also known as the ISM Services PMI. The headline Composite Index is at percent 45.5, up 3.7 from 41.8 last month. Today's number came in above the Investing.com forecast of 44 percent.

Here is the report summary:

"The NMI® registered 45.4 percent, 3.6 percentage points higher than the April reading of 41.8 percent. This reading represents contraction in the non-manufacturing sector for the second consecutive month, following a 122-month period of expansion. The Business Activity Index increased 15 percentage points from April’s figure, registering 41 percent. The New Orders Index registered 41.9 percent; 9 percentage points higher than the reading of 32.9 percent in April. The Employment Index increased to 31.8 percent; 1.8 percentage points higher than the April reading of 30 percent." [Source]

Unlike its much older kin, the ISM Manufacturing Series, there is relatively little history for ISM's Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. The chart below shows the Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

The more interesting and useful subcomponent is the Non-Manufacturing Business Activity Index. The latest data point at 41.0 percent is up 15.0 from a seasonally adjusted 26.0 the previous month.

For a diffusion index, this can be an extremely volatile indicator, hence the addition of a six-month moving average to help us visualize the short-term trends.

Theoretically, this indicator should become more useful as the time frame of its coverage expands. Manufacturing may be a more sensitive barometer than Non-Manufacturing activity, but we are increasingly a services-oriented economy, which explains our intention to keep this series on the radar.

Here is a table showing the trend in the underlying components.