ISM-Non Manufacturing Increases by Most Since 1997

Investors looking for a V-shaped recovery might have found one piece of U.S. economic data that resembles this – the ISM Non-Manufacturing. For June, it beat expectations, moving well into expansionary territory. 

The majority of the services sector grew – Business Activity Index, New Orders Index, Supplier Deliveries Index, and even the Employment Index. However, one particular component did not enter growth territory. You guessed it already; it is the employment component.

The Comeback of the American Service

The data shows good news on so many levels. First, the market expectations were for growth to the 50 level – the line in the sand between expansion and contraction. Considering the previous month release of 45.4, even the 50 level would have shown progress. Instead, the 57 print marked the largest month on month increase since 1997.

Second, because the American economy is a service-based one, the sector’s evolution has a big impact on the overall GDP. Therefore, the expectations are that there will be some positive spillovers into the GDP print later down the road.

Third, looking at some industries within the sector, there is a strong comeback in sales volume too. For example, businesses in agriculture, forestry, fishing, and hunting saw a surprising rise in sales volumes in the last four weeks. It suggests the consumer is having a strong comeback, too, with investors paying attention to data further in the calendar month. Even prices rose, calming the nerves of investors seeing the perfect conditions for deflation to set it.

However, caution is needed, especially when interpreting an index like the ISM. Any progress is interpreted with the previous month’s level. In other words, if an economy contracts 50% and then increases 5%, the ISM shows expansion, but the overall activity is far from the initial values.

Also, the employment component is one of the closely watched by investors and traders. Typically, the ISM Non-Manufacturing is released in the same trading week with the NFP, a couple of days before the jobs data – this time it was different due to the 4th of July holiday. Traders consider the ISM employment component a strong indication for what the NFP will show later.

Because the employment component remained below expansionary territory, one may conclude that the NFP enthusiasm last Friday is not justified. More data is needed to fully comprehend the strength of the June 2020 ISM Non-Manufacturing report.