- by New Deal democrat
If Monday’s ISM manufacturing report was good (but with a dose of inflation), today’s ISM services report for February was even better (but also with a dose of inflation). Together they negative the likelihood of an economic downturn in the next several months (geopolitical idiocy aside).
Let’s take a look. Recall that services represent about 75% or all economic activity, with the goods producing sector the other 25%. Also, typically I average the last three months of each reading to reduce noise. As we will see today, I really don’t need to do that, because the message is pretty clear. In all the graphs below, the services reading is in blue, the equivalent manufacturing one in grey.
Let’s start with what has been the most moribund reading — that on employment. On Monday, we saw that manufacturing employment got “less bad,” improving to 48.8. This morning’s services employment diffusion reading was 51.8:
There is strong evidence that there was a bottom in employment last July, and an improving trend since. The three month average in services has been 51.3, i.e., weakly positive. The economically weighted average vs. manufacturing employment’s 47.2 three month average is 50.3 - just barely positive, but nevertheless the best reading in a year.
As similar pattern shows up in the headline number, which for services came in at 56.1 for February. The three month average is 54.6:
The bottom in the headline number was a little before employment, in the May through July period. The economically weighted three month average including manufacturing is 53.7, solidly if not sharply positive.
The more leading new orders component improved to a strong 58.6. The three month average also increased to 56.1:
New orders bottomed in the March through May period of last year. Their economically weighted three month average including manufacturing increased to 55.4, a very positive number — and the most positive number in over 3 years. Needless to say, this is an excellent development for the economy.
But nothing is perfect, and the problem child in both ISM indexes is inflation, in the form of prices paid. The services component did decline to 63.0, bringing the three month average down to 64.9 (which is still a very concerning number for prices), the lowest in over a year:
The economically weighted three month average of prices paid is 63.2, suggesting inflation remains entrenched in the broad economy.
Two final points: first, the ISM services reports have been wildly divergent from the regional Fed services indexes, which have been very negative for months, most recently averaging -10. One of these is giving a false signal.
The second is that the ISM services reports *are* confirming what I have been seeing for months in the Redbook weekly retail spending report, which has not just been positive, but increasingly so in the latter part of 2025 into this year:
Again, I suspect the very strong retail spending data, as well as the services diffusion indexes reported above, has almost everything to do with a wealth effect generated by stock price increases in the past year, which in turn were the result of AI data center related spending.
In any event, mark down this morning’s services report in the solidly positive column, and hope it does not get derailed by idiocy in the Middle East.
