ISM: Service Sector Data Improves Dramatically

The latest service sector statistics from the Institute of Supply Management (ISM) is registering strength not seen since the recession started to loom in 2008. The reading is now at 58.7. Just as construction led the way in early 2008, it seems to be doing so in July 2014.

It almost goes without saying, but as services go, so goes the overall economy. As important as the manufacturing sector is to the US and to the export sector, it accounts for just a little less than 20% of the total national GDP. The other 80% is services of one kind or another.The health care sector alone is about 25% of the economy, and then there are the other big categories like retail, construction, professional services and so on.

Almost everything about this month’s ISM data comes as a pleasant surprise. The July surge was not seen as likely given some of the recent headwinds in the economy, but there were gains in areas that most had not expected. Of the 18 industries that are surveyed, only one fell back (utility sector). Of the other 17 surveyed, the biggest jump was in construction, shocking analysts. The question now is whether that activity is an anomaly or a trend that might manifest for the rest of the year after previous assessments predicted construction in 2014 would be stable at best.

Meanwhile, the New Orders Index rose from 61.2 to 64.9 in June, the highest reading since 2005. That is a very big deal and quite possibly the best news from the index as a whole. The service sector readings for the most recent NACM Credit Managers’ Index (CMI) were also good this month -- that bodes well for the future given that the CMI often predicts what is going to happen in the Purchasing Managers' Index later. It is hard to overestimate the importance of gains in the service side of the economy given its role in both GDP and employment. There will be little chance of a resurgent consumer without growth here, as this is where the jobs are and will be. The sense is that only a few sectors are carrying the load right now, and these are the traditionally volatile sectors.

- Armada Corporate Intelligence

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