- by New Deal democrat
The economically weighted ISM manufacturing + services indexes have become one of my favorite datapoints. That’s in part because the former has a nearly 80 year history of being a solid leading indicator, although somewhat attenuated since the start of the Millennium. But the latter now also has a long enough track record that their combined weight has been accurate for the pat 25 years. The second reason is because they are very current: for example, this week’s reports are for May - as opposed to measures like durable goods, which are delayed one to several months.
To recapitulate, since services are about 75% of the economy, they are 75% of the weighting, with the manufacturing report being the other 25%. Additionally, to reduce noise and increase signal, I pay particular attention to the three month moving average of the weighted average. The one drawback of these is that they are diffusion indexes. They do not tell us how “strong” a trend is, but rather how widespread. For example, if 50% of businesses say they are adding employees, 30% say they are laying off employees, and 20% report no change, the number is calculated as 50-30=+20, /2 = +10. Since 50 is the neutral reading 50+10=60.
On Monday we got the manufacturing report, which was very positive for new orders, but showed a contracting jobs situation, and widespread price increases. This morning’s ISM services report was similar. [Note: in all the graphs below, the manufacturing number is in blue, and the services number in gray].
Let’s start with the headline number, which rose +0.9 to 54.5. But the three month average declined by -0.6, to 54.0. This compares with the manufacturing three month average of 54.8, the weighted average is 54.2:
New orders rose 1.8 to 57.3, although the three month average declined -0.5 to 57.1. Since the manufacturing average was 54.7, the weighted average is 56.5:
In other words, both the headline and the more leading new orders indexes were strongly positive.
But as with manufacturing, the employment situation is not so sanguine. It has been in contraction, and contracted a further -0.1 to 47.9. The three month average declined -1.3 to 47.0. Since manufacturing employment also was in contraction, although “less bad,” at 48.3, the weighted average declined -1.2 to 47.3:
This is the second month in a row that the weighted employment average has indicated contraction, and is close to its low levels of last summer, during which the jobs reports aaveraged no growth at all. By contrast, although I won’t bother with a graph, this morning’s ADP report suggested an increase of 125,000 jobs in May.
Finally, inflationary pressures in services picked up further in May, as prices paid rose 0.6 to 71.3. The three month average rose 2.8 to 70.9. The economically weighted average rose 3.3 to 73.6:
This means that almost 50% more business were raising rather than lowering prices across the broad economy. Note that the above graph, unlike the first three, goes back five years to show that the current situation is almost as bad as the worst of the post-pandemic inflationary spike.
Since gas prices at the pump rose somewhat less on average in May than in March and April, an issue might be whether consumer inflation would abate. The combined ISM reports suggest it will not. In which regard, interestingly the Cleveland Fed’s consumer inflation estimate for May currently rounds to 0.5%.
So the situation with services in May remained economically expansionary, but not for jobs, and with lots of inflation - a virtually identical situation that we saw for manufacturing in the ISM report for that sector two days ago.
