ISM Non-Manufacturing Index

The service sector continued to expand last month according to the Institute for Supply Management’s non-manufacturing index, which, at 53.3, remained above the break-even level of 50.

 Values > 50 = Expansion

The most forward-looking component of the index, new orders, was 52.8, a sign that production activity is likely to expand slowly in the near future. The employment sub-index registered 51.6, meaning that service businesses added jobs at a sluggish pace last month. At first glance this contradicts the employment situation report released on Friday by the Bureau of Labor Statistics, which showed zero net new jobs created last month. However, that report was skewed lower by the temporary loss of 45,000 striking Verizon workers. Several service-related sectors added jobs in August led by education and health services, up 34,000, and professional and business services, up 28,000. The potential for a recession has increased in recent weeks as consumer confidence has cratered, the fears of financial contagion from Europe have spread, and the manufacturing sector has decelerated. In this context, the ISM non-manufacturing index, which covers 80 percent of the economy, raises some hope that the economy can stave off a near-term recession.

Philadelphia Fed Survey

Several economic indicators began flashing yellow last week, and one of the most worrisome is the monthly Business Outlook Survey from the Philadelphia Federal Reserve, which tracks manufacturing conditions in central and eastern Pennsylvania, southern New Jersey and Delaware. One of several regional manufacturing surveys, the Philly Fed report does not carry as much weight as national indicators such as the ISM manufacturing index, but last week’s release showed an eye-popping plunge in activity among the region's manufacturers this month.

New orders declined sharply and inventories rose, both of which will weigh on future production. The sudden deceleration seems related to deteriorating economic conditions in Europe, an important destination for U.S. exporters. Slipping confidence among U.S. consumers and businesses also played a role. The survey results are consistent with the Empire State Manufacturing Survey released earlier last week by the New York Federal Reserve. Activity shrank for a third consecutive month in New York and in two of the past three months in the Philly survey. Manufacturing has been one of the few economic bright spots, so any weakening would hurt the broader economy. In commercial real estate, the industrial property category would be most at risk if the manufacturing slowdown continues.