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With the shutdown of the official government sources, along with the regional Fed indexes, the ISM manufacturing and services indexes have become especially important. To recap, because of manufacturing’s diminished importance to the general economy, the services index has become significantly more important. For forecasting purposes, I assign a 75% weight to services, and a 25% weight to manufacturing, which is approximately their contribution to the total economy. Because there is some noise in the monthly numbers, I use the three month average of each.

On Monday, we saw that manufacturing continued to contract. The story was quite different in this morning’s services report, as the headline number increased to 52.4 (anything over 50 indicating expansion), while the more leading new orders subindex jumped from 50.4 to 56.2. As a result, the three month average of the headline number continued in modest expansion, at 51.5, while the new orders subindex rose to 54.2, a solidly expansionary reading.

Here is what the two headline numbers, for manufacturing and services, look like:

Since the three month average of the manufacturing index was 48.7, the economically weighted headline number rose to 50.8.

Next, here is the comparative look at the two new orders indexes:

Since the three month average of the manufacturing new orders subindex was 49.4, the economically weighted new orders number also rose to 53.0.

Because of the government shutdown, as I did Monday, I am paying more attention to the prices paid subindex as well. For services that rose to 70.0, the highest reading since the end of 2022, with the three month moving average being 69.5:

The manufacturing prices paid three month average was 58.0, so the economically weighted subindex stands at 66.6.

Finally, the employment numbers are also particularly significant now as well. In services as in manufacturing, these continued to indicate contraction, at 48.2. The three month average for services employment is 47.3:

(Click on image to enlarge)

Since the three month average for manufacturing was 46.0, the economically weighted employment reading is 47.0, indicating contraction.

Once again, the ISM monthly readings for services were in accord with the regional Fed reports. We see modest expansion - indeed a pickup of activity since the summer, and also a pickup in new orders, but a slight decline in employment, with rampant inflation - i.e. stagflation, but a stagflation which is currently still balanced towards expansion.

Since we won’t get a jobs report on Friday, I will offer a more detailed analysis of all the alternative measures of employment on Friday instead.

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