The Institute for Supply Management August 2009 Non-Manufacturing ISM Report On Business® shows the Non-Manufacturing (Service) sector is still contracting.

“The NMI (Non-Manufacturing Index) registered 48.4 percent in August, 2 percentage points higher than the 46.4 percent registered in July, indicating contraction in the non-manufacturing sector for the 11th consecutive month but at a slower rate. The Non-Manufacturing Business Activity Index increased 5.2 percentage points to 51.3 percent. This is the first time this index has reflected growth since September 2008. The New Orders Index increased 1.8 percentage points to 49.9 percent, and the Employment Index increased 2 percentage points to 43.5 percent. The Prices Index increased 21.8 percentage points to 63.1 percent in August, indicating a substantial increase in prices paid from July.”

Non-Manufacturing Survey Results

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Even though things are contracting at a slower pace, 12 non-manufacturing industries are still contracting while only 6 are expanding. From the report:

The six industries reporting growth in August based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Health Care & Social Assistance; Transportation & Warehousing; Utilities; Accommodation & Food Services; and Information. The 12 industries reporting contraction in August — listed in order — are: Management of Companies & Support Services; Mining; Finance & Insurance; Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; Construction; Other Services; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Educational Services; Public Administration; and Retail Trade.

The most striking thing in the report is the price index soaring from 41.3 to 63.1. Bloomberg discusses the report in U.S. Service Industries Contracted at Slower Pace.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 48.4, exceeding forecasts and the highest level in 11 months, from 46.4 in July, according to the Tempe, Arizona-based group. Readings below 50 signal contraction.

A measure of new export orders rose to 54 from 47.5, while the index of prices paid rose to 63.1, the highest in 11 months, from 41.3. The gain in prices was the biggest 1-month jump since records began in 1997, due to higher energy costs.

Federal Reserve efforts to unlock credit and government measures such as the “cash-for-clunkers” incentive program are reviving demand and may help the economy grow this quarter.

“We’re coming out of the recession,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The main problem is the lack of jobs and we know consumers are in fairly fragile health.

A report earlier today showed more Americans than anticipated filed jobless-benefit claims last week, indicating companies remain focused on cutting expenses even as the recession eases. Applications fell by 4,000 to 570,000 in the week ended Aug. 29, exceeding the 564,000 median forecast in a Bloomberg survey, figures from the Labor Department showed. The total number of people collecting unemployment insurance rose.

Notice the silly belief in cash-for-clunkers. It is nearly universal. I expect auto sales to quickly collapse, proving the only real demand is when government gives away “free money”.

While the jobs picture is worsening at a lesser rate, the key is that the employment index at 43.5 is still worsening and quite a ways from the break even point at 50.

Whatever is driving energy prices does not seem sustainable given falling natural gas prices and relatively stable prices elsewhere in the energy sector.

Natural Gas Monthly Chart

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Natural gas futures are at an amazingly low $2.54 this morning. I have to admit that I did not expect to see $2.50 prices again when the futures spiked about a year ago.

Mike “Mish” Shedlock
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