Just as the U.S. economy spent the first part of this year outperforming most people's expectations, it has spent the past while underperforming them - not a good sign, unless of course you're betting on a "double-dip" recession. The latest mediocre number came Thursday, when the Institute for Supply Management came out with its measurement of non-manufacturing activity, and the index came in a lot lower than most estimates.
One month isn't much to go on for an indicator that can be quite volatile, but August marks the third month in a row that the non-manufacturing ISM has come in below estimates, and the third month it has fallen from the previous period. Also worrisome is the fact that the service sector has been a strong point in the U.S. economy so far, and weakness there raises concerns about the prospects for what remains an anemic recovery.
The ISM non-manufacturing index measures the behaviour of U.S. purchasing managers, and is the companion to the manufacturing-based index formerly known as the NAPM (the institute changed its name from the National Association of Purchasing Managers). Although the non-manufacturing index is much newer - it has only been compiled since 1998 - both are closely followed by anyone trying to read the economic tea leaves.
Surveys in advance of the non-manufacturing number showed that most expected it to rise to 54 from 53.1 in July (anything over 50 indicates that activity is increasing). The index "should bounce higher in August ... [reflecting]better auto sales, a surge in mortgage banker activity, and a still-blistering housing market," Joseph Abate of Lehman Brothers told Reuters, saying he expected it to hit 55. Together with the manufacturing ISM, "These data suggest the economy is not about to double-dip," he said.
Economist Kermit Schoenholtz of Salomon Smith Barney said the index would likely hit 55.5, "reversing almost 60 per cent of the reported July decline." He added that the "price diffusion index," which measures whether prices in the sector are rising or falling, "probably rose by one-half point to 59.5, indicating more widespread increases in purchased materials and services costs." Other economists also said that they expected a rebound in the index after a fairly weak July report.
They were all disappointed: the August index also came in much weaker than expected at 50.9, barely above the break-even line and the lowest reading for the economic indicator since January. "August's rate of growth was less substantial and bordered on no growth at all," said Ralph Kauffman of the ISM survey committee. In July, the index came in at 53.1, down sharply from 56.9 in June and lower than the average forecast of 55.4, but many economists said it was likely to be a one-month blip.
Whatever it was, it doesn't seem to have been a one-month blip. Some economists argue that the non-manufacturing index is relatively new, and therefore its predictive ability is somewhat limited compared with its better-known counterpart (which has been around since 1931). Others have argued that weakness in the retail and consumer sectors in the summer months is not unheard of, and that July and August should not be taken as evidence that the economy is sinking back into recession.
All of that is true, of course, but the fact remains that three months in a row of slower growth isn't exactly what economists were hoping for. And some of the more forward-looking parts of the ISM have worrisome aspects to them as well - for example, the new orders index, another closely-watched indicator, fell to 51.6 from July's rate of 52.6. New export orders fell by more than 13 points to 46 from 59.5 in July, and employment shrank again, though not by as much as in July.
Also on Thursday, retailing behemoth Wal-Mart reported that its August sales were lower than expected - particularly back-to-school apparel, which tends to be one of the seasonal bright spots for retailers. Wal-Mart said its sales at stores open more than a year rose by only 3.8 per cent, compared with earlier forecasts that saw sales climbing by between 4 and 6 per cent. Other retailers have also reported weaker back-to-school sales, and said consumers seem to have grown wary about further spending.
That would probably come as a surprise to anyone reading about record auto sales and skyrocketing house prices, but then those consumer-oriented phenomena are being driven by zero-interest financing and low mortgage rates. How much longer can that trend continue? And is the ISM a sign of a normal weakening period during a recovery, or a symptom of something broader? Nervous investors will no doubt be watching future economic indicators - such as Friday's U.S. job report - with an eagle eye.
E-mail Mathew Ingram at mingram@globeandmail.ca
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