(originally published on February 9, 2008)
The Institute of Supply Management's non-manufacturing index, released ahead of schedule this week amid concerns that the information had been leaked, reported that the US service sector contracted in January for the first time since March 2003. The index plummeted to 44.6 from 53.2 in December, its largest monthly decline on record and significantly below the median expectations of economists polled by Reuters of 53.0. This was the lowest reading since October 2001 in the aftermath of the Sept 11 terrorist attacks. A reading below 50 indicates contraction. The farther the reading is from the midpoint of 50, higher is the degree of expansion or contraction. As seen below, the chart of the ISM index looks like it has fallen off the edge of a cliff.
ISM non-manufacturing index falling off the cliff
There have been only two occasions in the past ten years when the index has dipped into contractionary zone when the economy has not already been in a recession. That is not entirely surprising considering that this index reportedly captures roughly 80%-90% of the economy (Source: Bloomberg). A contraction of this magnitude suggests that business expectations are being drastically curtailed. Employment expectations are also sharply down from 51.8 to 43.9, corroborating last week's dire non-farm payrolls report that showed the first net monthly contraction in the labor market in more than four years. New orders declined sharply as did all the other forward looking indicators.
ISM non-manufacturing data over the last few months
Skeptics will surely question the validity of the data set as it has a relatively short history (starting July 1997) and has not actually measured a deep recession. While the weakness could have been overstated, this is the most compelling evidence to date that economic growth has indeed slowed markedly from December. Although there is nothing to feel good about this data, the gloom that this report evoked (370 point sell-off on the Dow Jones Industrials), sort of justifies the Fed's aggressive 125 bps easing in less than ten days last month.
No comments:
Post a Comment