– May 5, 2020

The Institute for Supply Management’s nonmanufacturing index dropped to a reading of 41.8 in April from 52.5 in the prior month. The April result is the first below the neutral 50 threshold since December 2009 and the lowest result since March 2009 during the Great Recession (see top chart). Readings above 50 suggest expansion for the nonmanufacturing sector and historically, readings above 48.5 have suggested expansion of the overall economy. The April figure ends a run of 122 months of expansion for the sector and 128 months of growth for the economy. The latest results are also in line with the manufacturing survey that also were well below neutral.

Among the key components of the nonmanufacturing index, the business-activity index (comparable to the production index in the ISM manufacturing report) was 26.0 in April, down from 48.0 in March and is the lowest reading since the survey began in 1997. For April, 17 industries in the nonmanufacturing survey reported contraction.

The nonmanufacturing new-orders index dropped to 32.9 from 52.9 in March (see bottom chart). Two industries reported growth, Public Administration and Finance & Insurance while 16 reported contraction. The new-export-orders index, a separate index that measures only orders for export, was 36.3 in April, the lowest since November 2008. Three industries reported growth in export orders while 14 reported declines.

The nonmanufacturing employment index came in at 30.0 in April from 47.0 in March. The weaker reading suggests services-sector employment likely fell for the month. The jobs report from the Bureau of Labor Statistics is due to be released on Friday May 8. Consensus is for a loss of 21.8 million new non-farm jobs with 21 million coming from the private sector, and an unemployment rate of 16 percent.  To help put these numbers in perspective, during the Great Recession in 2008-09, total payroll job losses were 8.8 million over 25 months. The peak number of unemployed people for the Great Recession, as measured in the household survey portion of the monthly Employment Situation report, actually occurred in October 2009, four months after the official end of the recession, and was 15.4 million.

As of the March 2020 Employment Situation report, there were 7.1 million unemployed in the United States, resulting in an unemployment rate of 4.4 percent. The previous cycle peak in the unemployment rate was 10 percent in October 2009 while the highest unemployment rate since 1950 came in November 1982 at 10.7 percent. Though data collection was much less reliable, the unemployment rate following the Great Depression was estimated to have peaked at 25 percent in 1933.

Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 78.3, up from 62.1 in the prior month. It suggests suppliers are falling further behind in delivering supplies to nonmanufacturers and the slippage has accelerated sharply from the prior month. Typically, slower deliveries are consistent with a strong economy but in this environment, the slower deliveries are a result of production constraints and transportation difficulties, not strong economic conditions.

The latest report from the Institute of Supply Management suggests that the nonmanufacturing sector and the broader economy contracted in April. The results are consistent with the weak results of the ISM manufacturing survey and nearly all other recent economic data.  

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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