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ISM Non-Manufacturing: Headline Beat, Weak Internals

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The ISM Non-Manufacturing Report on Business was released today and beat expectations. The index came in at 53.7, beating estimates of a reading of 53.4 (slightly). April's print was 53.5, so the services sector showed very slight improvement month-over-month.

The report was a mixed bag, with different sub-indexes telling different stories. The New Orders sub-index increased two percentage points to 55.5 from 53.5 in April. Supplier deliveries also increased in the prior month, growing to 53 from 51.5 in April. However, that is all of the good news.

A lot of the internals were very weak. The employment sub-index fell 3.4 percentage points to 50.8 from 54.2 last month. This is on top of the .4 percentage point fall in the manufacturing employment sub-index and the weak non-Farm Payroll report last week.Inventories also grew significantly, increasing 2 percentage points to 56. Prices fell 3.8 percentage points to 49.8, meaning that prices have peaked. This follows the 13.5 percentage point drop in the manufacturing prices sub-index to 47.5. Ladies and gentlemen, we have disinflation. Inflation is now about to start to ease due to weak growth.

Further weakness came from exports and imports, with exports falling 5 percentage points month-over-month and imports falling 3.5 percentage points. What this report, in combination with the ISM Manufacturing Report on Business tells us is that the economy is slowing, trade is collapsing due to foreign stresses, and employment growth is beginning to stall.

All in all, a beat on the headline but weak internals continue to make me very cautious.

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