ISM says non-manufacturing activity has picked up
Economic conditions force Treasuries lower (Part 7 of 14)
Services PMI
The Institute for Supply Management (or ISM) publishes Purchasing Managers’ Index (or PMI) reports for manufacturing and non-manufacturing sectors. Last week, ISM published its monthly Non-Manufacturing ISM Report on Business. The Non-Manufacturing Index (or NMI) is a composite index based on the following fours indices, which have equal weights of 25% each:
business activity (seasonally adjusted)
new orders (seasonally adjusted)
employment (seasonally adjusted)
supplier deliveries
The NMI for February stood at 56.9%, slightly up from a reading of 56.7% in January. A reading above 50% means a general expansion in non-manufacturing (or services) activity. A reading below 50% means a general contraction. The service sector not only reported a rise, but its pace picked up slightly. The ISM states that NMI higher than 48.7% over time indicates growth in the overall economy.
Details of the report
The Business Activity Index fell 2.1% to 59.4% in February after having risen in January. So although business activity continued to expand, it did so at a slower pace. New orders for services also fell as the New Orders Index fell 2.8% month-over-month to 56.7% in February. On the other hand, the Employment Index rose sharply by 4.8% to 56.4% in February.
Input prices continued to decrease, but the pace slowed compared to January. The Prices Index rose 4.2% to 49.7% in February. Although the pace picked up, the reading was below 50%, thus signaling a contraction.
Fourteen industries reported growth in February, while four reported a contraction. The growing industries included Accommodation & Food Services and Wholesale trade. Mining and Construction reported a contraction.
Improvement in service sector industries can be attributed to positive consumer sentiment. This can benefit companies such as Procter & Gamble (PG), Mondelez International (MDLZ), and The Coca-Cola Company (KO).
Improving services PMI would also benefit ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY), whose investments include restaurant chains such as Yum! Brands (YUM).
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