– October 5, 2020

The Institute for Supply Management’s services index posted a 0.9 percentage-point increase in September, rising to a reading of 57.8 from 56.9 in the prior month (see top chart). The results suggest a fourth month of expansion for the services sector and the broader economy.

Among the key components of the services index, the business-activity index (comparable to the production index in the ISM manufacturing report) rose to 63.0 in September, up from 62.4 in August. For September, 16 industries in the services survey reported expansion.

The services new-orders index rose to 61.5 from 56.8 in August, a gain of 4.7 points (see bottom chart). Fourteen industries reported expansion in new orders in September. The new-export-orders index, a separate index that measures only orders for export, was 52.6 in September, versus 55.8 in August. Six industries reported growth in export orders.

The services employment index came in at 51.8 in September, up from 47.9 in August. Employment remains one of the most concerning areas of the economy. Though there have been large gains in jobs over the last few months, the pace of gain has been slowing, and high levels of initial claims for unemployment insurance along with elevated levels of continuing claims for unemployment insurance suggest complete economic recovery is highly uncertain.

Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 54.9, down from 60.5 in the prior month. It suggests suppliers are falling further behind in delivering supplies to services businesses, but the slippage has decelerated from the prior month. Typically, slower deliveries are consistent with a strong economy but in this environment, the slower deliveries may be partially a result of production constraints and transportation difficulties. Thirteen industries reported slower deliveries in September.

The latest report from the Institute of Supply Management suggests that the services sector and the broader economy expanded in September; those results are broadly in line with the results of the manufacturing survey.

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell slightly in September, posting a 55.4 percent reading for the month, down from 56.0 percent in August but still solidly above the neutral 50 threshold (see top chart). Overall, the report notes, “After the coronavirus (Covid-19) pandemic brought manufacturing activity to historic lows, the sector continued its recovery in September. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories and are becoming more proficient at maintaining output. Panel sentiment was optimistic (2.3 positive comments for every cautious comment), an improvement compared to August.”

Among the key components, the New Orders Index came in at 60.2 percent, down from a very strong 67.6 percent in August but still a very favorable result (see bottom chart). Twelve of eighteen industries in the survey reported growth in new orders in September. The New Export Orders Index came in at 54.3 percent in September, up 1.0 percentage point from a 53.3 percent result in August. The Backlog-of-Orders Index came in at 55.2 percent in September, up from 54.6 percent in the prior month.

The Production Index registered a 61.0 percent result in September, down from 63.3 percent in August but a very solid reading. Fourteen industries reported growth in the latest month versus three reporting a decrease in production.

The Employment Index posted another gain, rising 3.2 percentage points to 49.6 percent in September, versus 46.4 percent in August. However, the employment index remained below neutral for a 14th consecutive month suggesting labor dynamics in the manufacturing sector remain suspect, though the Bureau of Labor Statistics reported a gain of 66,000 payroll jobs in September for the manufacturing sector (46,000 in durable-goods manufacturing and 20,000 for nondurable goods).

The Supplier Deliveries Index, a measure of delivery times from suppliers to manufacturers, rose to 59.0 percent from 58.2 percent in August. Slower supplier deliveries are usually consistent with stronger manufacturing activity. However, the slower deliveries in recent months have been more a result of supply chain and logistical constraints. According to the report, “Suppliers continue to struggle to deliver, with deliveries slowing at a faster rate compared to August. Transportation challenges and continuing difficulties in supplier labor markets are still constraints to production growth. The Supplier Deliveries Index reflects the difficulties suppliers continue to experience due to Covid-19 impacts. These issues are not expected to diminish soon and, at this time, represent a continuing hurdle to production output and inventories growth.”

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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