Yesterday’s ISM Non-Manufacturing or services report confirmed what we have known for a few months now – the services sector continues its climb back to pre-crisis levels. There is still a long road ahead, especially if we consider that this is nothing, but a diffusion index and the data compares the improvement, if any, from the previous month.
Therefore, if the previous month the report showed a contraction to 45 and the next month an expansion to 52, overall the sector would still contract. Only this is the fourth consecutive ISM Non-Manufacturing report that shows an increase from month to month. Moreover, the August 2020 report is the third consecutive showing an expanding sector (i.e., data comes out above the 50 level).
Business Activity Index Surges in August
There are many positive takeaways from the August services report. To start with, the business activity index, at 62.4, is well into the expansion territory. It comes down from 67.2 in July but nevertheless shows growth, albeit at a slower pace.
New Orders for the month declined from 67.7 to 56.8, but somehow still manages to remain in the expansionary territory. What matters for most traders and investors when interpreting the ISM data is the employment component of the sector.
Employment is the only component part of the August report that continues to contract. More precisely, it has failed to climb back above 50 ever since the coronavirus pandemic started. In August, it grew from 42.1 to 47.9, an improvement of 5.8 points, but still failing at the 50 level.
It represents the only negative in the report, albeit a pretty important one. It is important because the United States is a service-based economy, and if the services sector is not able to add jobs back to the pre-crisis level, all other components of the ISM Non-Manufacturing report are likely to signal just temporary pullbacks.
All in all, it is a good report ahead of the NFP release later today. It shows a resilient U.S. economy, one that struggles to recover, especially if we are looking at the employment component.
Moving forward, what investors would like to see is a continuing string of positive data. More precisely, the more consecutive months the ISM Non-Manufacturing manages to stay into expansionary territory, the quicker the economy will bounce back to pre-pandemic levels.