Interpreting Last Month’s ISM Non-Manufacturing Data
The Institute for Supply Management (ISM) yesterday released Non-Manufacturing, or services data, following the manufacturing numbers coming out last Monday. The overall non-manufacturing index rose to 45.4, beating both the April release of 41.8 and the forecast for this month of 44.2.
The index, which is centered on surveying business managers in the services sector in the United States, remains in contractionary territory (below 50), despite rising from recent lows.
Focus on the Employment Component
The ISM index is the equivalent of the Markit PMI calculated and released monthly for most of the developed and developing countries. Values below the 50 level indicate a sector that contracts, while values above 50 show an expanding sector.
They are particularly important for traders if they refer to a dominant sector as a percentage of the GDP . Moreover, the data offers insights into other pieces of economic releases, crucial for monetary policymakers, such as the employment data.
In this case, the services sector has a significant weighting within the GDP of the United States. Furthermore, the employment component is important for traders because the ISM Non-Manufacturing data is released only two days ahead of the crucial monthly NFP (Non-Farm Payrolls) and Unemployment Rate.
In uncertain times like the times of the coronavirus, everyone wants to know if the bottom, at least in terms of bad economic data, is already in place? If yes, did the business cycle turn? This being because if lagging indicators like employment data point to a potential recovery, it may just mean that the worst has passed at least in terms of the economic downturn.
In this case, the employment component for the non-manufacturing sector rose from 30 in April to 31.8 in May, a positive, albeit modest improvement.
However, coupled with the employment data revealed by the manufacturing sector on Monday, 32.1 in May vs. 27.5 in April, shows a positive trend that stretches to both sectors.
Coupled with the fact that the ADP private business payrolls also show a positive development on Wednesday, the chances are that the NFP on Friday will also beat the April data. During normal economic conditions, such a fundamental analysis process would have a bigger impact on traders, because the way trading algorithms interpret forecasts vs. actual data.
However this time is different because the negative data is already priced in. Even signs of improvement are not enough to create a strong market reaction. To really surprise market participants, the NFP must exceed the positive signs revealed by the ISM releases this week.