What to Make of Recent ISM Reports

Every month The Institute for Supply Management (ISM) releases a comprehensive Report On Business consisting of two separate reports, the Manufacturing ISM Report and the Non-Manufacturing ISM Report. The manufacturing report includes the Purchasing Managers’ Index (PMI); the non-manufacturing report includes the Non-Manufacturing Index (NMI). These indices represent a collection of survey data from purchasing executives throughout various industries regarding changes in business metrics over the previous month.

ISM Manufacturing
In August the closely watched Manufacturing ISM Report on Business registered a decline in Manufacturing PMI below 50. A reading above 50 indicates expansion and a reading below 50 indicates contraction. The headline grabbing release was one of the first important data points signifying potential economic trouble. The sub-50 reading is significant because it corroborates other data indicating a slowing economy. 

Recent ISM Reports Chart1

ISM Non-Manufacturing
While the manufacturing sector continues to grab most of the headlines, even more important is the U.S. service sector, as measured in the ISM Non-Manufacturing report. The service sector accounts for the lion’s share of the U.S. economy and as such, is included on Allegiant’s Eco-nomic Dashboard. A Non-Manufacturing reading below 50 would be a very worrisome sign for the economy.

Recent ISM Reports Chart2

The good news: the ISM Non-Manufacturing report continues to indicate service sector expansion. To date, the service sector has avoided much of the trade-related uncertainty impacting the manufacturing sector. Continuously strong consumer confidence has lifted the service sector even in the face of weak activity elsewhere.

Trouble Could Be On The Horizon
The September report of ISM Non-Manufacturing PMI registered the lowest reading (52.6) since August 2016. While still indicating expansion, and remaining above our warning level, the trend is not encouraging. A service sector slowdown could push an already slowing U.S. economy into recession.

All Eyes on Confidence
The recent erosion of consumer and business confidence is beginning to flow through to hard economic data. Further erosion would lead to more challenges throughout the economy; a quick drop could even be enough to stall economic activity. The current trend line shows what has happened in the past; it does not necessarily predict what will happen in the future. As such, we cannot rely solely on the trend to extrapolate what will happen in the future.  A new trade deal, further Fed Funds Rate cuts, political clarity, or other unknown events could reverse the course, allowing much of the worrisome data to fade into the background.

Is it Time to Worry?
It may not be time to worry yet, but there are reasons to have our guard up. As the economy slows, systemic risks build, creating an imbalance in the normal risk-reward relationship. This may not create a problem today, but as other data follows suit the latent problem will become a pressing concern.