The regional economic reports from the Fed, as well as independent reports from the ISM, have been interesting to watch.

In general, recent reports have been strong, but factory output hasn’t matched. Such is the nature of diffusion indexes where the direction of trends is far more important than the reported quantity.

For example, two small companies hiring 3 workers each is twice as important as one large company firing 500 workers. The same holds true for all of the components in the survey.

There are also wide variances between reports that are supposed to measure the same thing. Let’s investigate today’s examples.

ISM Services Highest Since October 2015

Index February January PP Change Direction Rate of Change Trend in Months
NMI® 57.6 56.5 1.1 growing Faster 82
Business Activity / Production 63.6 60.3 3.3 growing Faster 88
New Orders 61.2 58.6 2.6 Growing Faster 88
Employment 55.2 54.7 0.5 Growing Faster 6
Supplier Deliveries 50.5 52.5 -2.0 Slowing Slower 11
Inventories 52.0 48.0 4.0 growing From Contracting 3
Prices 57.7 59.0 -1.3 Increasing Slower 8
Backlog of Orders 54.0 50.0 4.0 Growing From Unchanged 3
New Export Orders 57.0 48.0 9.0 Growing From Contracting 3
Imports 51.0 54.0 -3.0 Growing Slower 10
Inventory Sentiment 64.5 62.0 2.5 Too High Faster 234

The above data from ISM Report on Business

Import and export numbers in the above table are highly questionable even though the advance trade reading from the Census bureau was on goods only, not goods and services.

For details, please see Trade Deficit Unexpectedly Widens: Exports Sink, Imports Up Sharply.

We will know more when the complete trade report comes out.

Service Sector Growth at Five-Month Low

The Markit Services PMI report shows Service Sector Growth at Five-Month Low.

Key Findings

  1. Rates of expansion in activity and new work ease from January peaks
  2. Outstanding business falls for the first time in three months
  3. Relatively muted price pressures signaled

February data pointed to a slowdown in U.S. service sector growth. Rates of expansion in activity, new work and employment all eased. Meanwhile, volumes of work-in-hand were depleted for the first time since November last year. Sentiment regarding the year ahead also weakened, despite remaining upbeat overall. On the price front, both input costs and output charges increased at slower rates.

The seasonally adjusted Markit U.S. Services Business Activity Index dropped from January’s 14-month high of 55.6 to 53.8 in February. Though still signaling a solid expansion of service sector output, the latest reading was the lowest in five months and below the long-run series average (55.3).

Comments from Chris Williamson, Markit Chief Economist

  • “Taken together, the PMI survey readings for the first two months of the year suggest the economy is growing in the first quarter at a respectable annualized rate approaching 2.5%.”
  • “The burning question is whether the February slowdown merely represents some payback after a strong start to the year for US businesses, or whether it’s the start of a more entrenched slowdown.”
  • “A warning clue rests with the business expectations index, which indicates that business optimism has mellowed back to its post-election level, suggesting that companies are becoming more cautious with regard to spending and hiring.”
  • “However, companies continue to report buoyant domestic demand, especially from consumers, and continue to take on staff in reasonable numbers, the rate of hiring having slowed only modestly. The February survey is broadly consistent with 175,000 payroll jobs being added, which represents a pace of hiring that will do little to deter the Fed from delaying its next rate hike.”

Take your pick. Strong and strengthening or weakening?

Mike “Mish” Shedlock