Tuesday, February 5, 2008

ISM's Non-Manufacturing Report Suggests Recession has Started

The Institute for Supply Management released their “Non-Manufacturing ISM Report on Business” today.


Business activity, the most commonly reported component of the report, dropped from 54.4 in December 2007 to 41.9 in January 2008. This was the largest drop since ISM started compiling data for this report in July of 1997. This is the second lowest reading for Business Activity. The lowest was in October 2001 when it dropped from 49.7 to 40.5 following the 9/11 attacks. It then rebounded to 49.4 in November of 2001.


Today, ISM debuted a new index called NMI (Non-Manufacturing Index). This index is an average of Business Activity, New Orders, Employment, and Supplier Deliveries. NMI for January 2008 was at 44.58, which is the lowest ever. It has only been below 48 two other times (both during the recession of 2001).


Here is a chart showing how NMI would have looked going back to 1997. You can click on the chart for a larger view.



Per Bloomberg, the Non-Manufacturing Sector reflects almost 90% of the economy (hat tip The Big Picture). Services are the biggest component of GDP comprising 40.2% of 2007 fourth quarter’s GDP. If these NMI numbers continue in the future, then it looks like January (or even December) will go down as the official start of the recession. Here is a chart comparing NMI to GDP and Services.


Finally here is a chart showing Employment in the Non-Manufacturing sector compared to the Unemployment Rate. From the limited data we have, it looks like ISM’s Employment figures are a leading indicator for the Unemployment Rate – it reaches the bottoms and tops faster. It seems that once the economy starts heading into a recession, things quickly snowball as the economy tries to be proactive (conversely things quickly improve on the way up). This comment from a respondent in ISM’s survey reflects that: "Recession fears taking hold as cost containment strategies have been dusted off from 2002." (Finance & Insurance)

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