Last week, the ISM services took a nose-dive into serious contraction territory, causing a significant, 300+ point Dow drop. Clearly, the ISM sector indexes still have pull. But should they? Charles Dominick, an ISM competitor on the training and education front, says no way over on his blog, referring to them as "BS". Choice words, but are they that untrustworthy? Forbes ran a wire story quoting one financial analyst whose own data correlation called into question the accuracy of the survey. Stephen Gallagher of Societe Generale, who is quoted in the story, notes that the ISM non-manufacturing "news is considerably bleaker than the employment readings which have softened ... Job growth outside of manufacturing remains slightly positive even with the 17,000 total Non-Farm payroll loss reported for January. The last time we saw the ISM-Non-Manufacturing at these levels, non-farm jobs were falling by more than 200,000 workers/month."
In my view, ISM's poll is probably still directionally accurate but we should not take it as gospel, as this above analysis shows. While we can all agree there is probably a better way out there to measure overall economic activity in the manufacturing and service sectors in the economy, at this point, ISM is perhaps, the best source we have. If you're curious to know what data ISM uses for their analysis, the surveys are based on discussions with 300 large US companies (one would assume Fortune 500). The manufacturing index score -- which is actually still showing growth, thanks to the export market -- is based on "new orders, production, employment, supplier deliveries, inventories, prices, new export orders, imports and backlog of orders" while the non-manufacturing index is based on factors including "business activity, new orders, employment, and supplier deliveries."
- Jason Busch