As far as data points go, the ISM’s services sector report is the bridesmaid to the manufacturing report. The latter was one of the main drivers of Monday’s rally, whereas today’s services report will likely command a few minutes attention before people move on to Chris Dodd, conspiracy theories about the Fed gaming the market, and Woody Johnson’s poor daughter.
The common wisdom is the manufacturing sector drives the economy, and that may be true, but the services sector comprises the vast bulk of the overall economy, as I pointed out in today’s Ahead of the Tape column in the Journal, and the services report deserves attention:
The nonmanufacturing sector comprises 88% of the economy, and it follows that most of the nation’s jobs are in services ranging from construction to finance to pet care. While the worst of layoffs appear to be over, the services report is likely to show that hiring remains elusive.
Analysts expect the services-sector index to come in at a tepid 50.5 when the ISM reports the figure Wednesday morning. Readings above 50 generally indicate expansion. While 50.5 would mark the third month out of the past four above 50, the index’s slide in November to 48.7 shows that the services sector is still susceptible to a pullback. The ISM’s manufacturing index bested 50 for five months running.
A critical component of the services-sector index is even weaker: jobs. The employment sub-index, factored into the overall number, has contracted for 22 of the past 23 months, according to ISM. November’s 41.6 reading of service-sector employment remains in contraction territory.
I knew services made up the bulk of the economy, but I was surprised to find out it’s 88%, a number I got the ISM itself.
Unlike the manufacturing index, which has been above 50 five months running, the services index has been over 50 two of the past three months; it’s expected to come in at 50.5 for December, but was below 50 in November.
Now, this index is a diffusion index, which measures movement rather than actual levels. So a reading just just over 50 indicates the sector is generally expanding, but it isn’t a concrete reading. It’s more like a leading indicator.
Something that I wasn’t able to get into the story (you get only 350 words for Ahead of the Tape, so yes, here’s comes a bit of what we call a “notebook dump,”) but which definitely struck me as odd, was that in the November report, throughout their discussion of the various subindexes, the one sector that mentioned most as seeing strength was…other services.
This is a catch-all that includes pet-care services, administering religious activities, and dating services. That’s just strange, and it indicates to me that there’s scant strength in the broader sectors, like real estate.
So keep an eye on the employment subindex, especially with Friday’s monthly jobs report coming up. ADP this morning reported the service sector actually added 12,000 jobs in December, so that’s something to keep in mind. But if the ISM’s employment reading comes in below 50, it would be an indication that employers are still generally cutting or just maintaining employment levels.