The soft data divergence between the ISM Non-Manufacturing Report on Business and the Markit Services PMI widened again today. Let’s take a look at each report.

ISM Non-Manufacturing vs ISM Manufacturing

Non-manufacturing production, new orders, prices, and inventories are all ups strongly. Employment was the laggard.

The past relationship between the NMI® and the overall economy indicates that the NMI® for April (57.5 percent) corresponds to a 3.3 percent increase in real gross domestic product (GDP) on an annualized basis.

That quote is from the same folks who predicted 4.3% GDP growth in the first quarter.

Markit Services PMI

Markit: “Business Activity Subdued”

The Markit Services PMI report headline reads “Business activity continues to rise at historically subdued pace in April”.

Key Findings

  • New business continues to increase but at modest pace
  • Slowest rise in employment since July 2010
  • Input price inflation accelerates to highest level in 21 months

Growth of business activity was sustained in April, albeit at a relatively modest pace in line with fairly limited gains in new orders. With companies able to comfortably deal with current workloads, staffing levels rose at the slowest pace in nearly seven years.

On the price front, input costs increased at a sharper rate, but competitive pressures meant that charges were raised to the weakest degree for five months.

Faced with underwhelming growth in new business, the vast majority of companies (90%) reported no-change to their workforce numbers during the month. The net result was the weakest growth in employment signaled by the survey since July 2010.

Comments by Chris Williamson, Markit Chief Business Economist

  • “The final services PMI came in above the earlier flash estimate but remained only marginally higher than March’s six-month low.”
  • “Combined with a weak manufacturing PMI reading, the surveys suggest that business activity is growing at a slower pace than seen over the first quarter as a whole.”
  • “However, a robust rise is likely to be seen in second quarter GDP as the official numbers exhibit greater seasonality than the PMI, with consistently weak first quarters being typically followed by a rebound in subsequent periods. For this very reason, GDP data seemed to signal weaker growth than implied by the PMI in the first quarter of 2017.”

Markit predicted 1.7% GDP growth for the first quarter.

Now Williamson calls for a “robust rise” in second-quarter GDP.  It is unclear if he means to something like 2% or something much higher.

Comparing the Reports

Since both reports measure the same thing and even some of the same companies, the surveys ought to be similar but they aren’t.

There are two items the reports do agree on: A slowdown in hiring and price pressures.

Businesses are unable to pass on rising input costs. If accurate, that’s a pretty telling aspect of real consumer demand.

Those looking for robust GDP in the second quarter should consider Tracking GDPNow Forecasts vs. Reality: What About that Initial 2nd Quarter Estimate?

Mike “Mish” Shedlock