The Non-Manufacturing ISM report on business was released to day with a headline figure of 52% for the Non-Manufacturing Index (NMI), indicating that conditions had returned to expansion after a full Quarter of contraction. However the devil is in the details and a look at the components that make up the headline number shows a different story.

The Non-Manu ISM is designed to reflect conditions in the services area of the overall economy, which ISM judge to be about 80% of GDP. In January 2008 ISM began to run a composite index not Non-Manu which consists of the following components:

• Business Activity 25% – Business Activity: measures the rate and direction of change, if any, in the level of business activity.New Orders 25% – New Orders: reflects the levels of new orders from customers.

  Employment 25% – Employment: reports the rate of increase or decrease in the level of employment.

  Supplier Deliveries 25% – Supplier Deliveries: reveals if deliveries from suppliers are faster or slower.

We could get into a big discussion about the way the composite is calculated, i.e. why are the components equally weighted? That though is for another day. What I want to look at now is the reflection the headline NMI figure has on underlying conditions.

Importantly the following are not included in the NMI, despite what you see written in the financial news releases:
Inventories, Inventory Sentiment, Prices, Backlog of Orders, New Export Orders and Imports.

Yet this is typical of the release that happens (remember, already written and embargoed until the set time) and I am not picking on MNI, others do it too:

Yep, one left out and a non component included. Now could this just be a simple error (think about it, what other releases include information that isn’t in the headline figure?) but the follow up copy reads like this (I left out the detail about businesses remarks and inflation.)

• US DATA: Apr nonmfg ISM text: “The NMI (Non-Manufacturing Index) increased 2.4 percentage points to 52 percent, indicating expansion after three consecutive months of contraction within the non-manufacturing sector for April 2008. The Non-Manufacturing Business Activity Index decreased 1.3 percentage points to 50.9%… 12 non-manufacturing industries reported growth in April………Provided by: Market News International.

Now why would the actual components of an index be ignored or glossed over? Maybe when the underlying figures don’t reflect the headline? Let’s see:

So we get a headline figure of 52% on a below average employment number and a vast rise in suppliers deliveries. Here though is the rub, suppliers deliveries is an inverse measure. It climbs as deliveries slow.

Why would deliveries slow? It can only be one of two things, a bottleneck or a slowing of demand. The report showed no shortages, inventory sentiment pointed to inventories being too high (even though inventory levels fell) and imports slowed. I see no bottlenecks, so it must be a slowing of demand.
Now the reporting of supplier deliveries is from the end user, not the supplier. These are the sectors that reported slower demand for deliveries:

• Other Services*; Professional, Scientific & Technical Services; Retail Trade; Wholesale Trade; Accommodation & Food Services; Health Care & Social Assistance; and Educational Services. The one industry reporting faster supplier deliveries in April is Management of Companies & Support Services.*Other Services include: Equipment & Machinery Repairing; Promoting or Administering Religious Activities; Grantmaking; Advocacy; and Providing Dry-Cleaning & Laundry Services, Personal Care Services, Death Care Services, Pet Care Services, Photofinishing Services, Temporary Parking Services, and Dating Services.

You can guess which way I view the April ISM and it ain’t bullish, in fact it looks ugly for consumer reliant business.

Finally, can anyone make a figure of 52% from the 4 components that makes sense after the look at the detail?

50.9 + 50.1 + 50.8 + 56 = 207.8 Divided by 4 = 52% (approx). So Non Manu ISM went up on a slowing of suppliers deliveries that were not caused by a shortage of goods. Hey, if deliveries keep slowing at this rate we will have a full blown recovery by July!

Market Snippets

Countrywide, the mortgage lender whose debt was cut below investment grade by Standard & Poor’s last week, declined after Friedman Billings Ramsey & Co. said Bank of America Corp. should abandon or reduce its $4 billion takeover bid. Countrywide lost 57 cents to $5.23. Bank of America will probably reduce its per-share offer to the “$0 to $2 level” from about $7, Friedman Billings Ramsey analyst Paul Miller wrote in a research note. (Bloomberg)

Berkshire Hathaway slid $1,700, or 1.3 percent, $131,900. Buffett’s company said profit declined as falling rates cut returns from insurance operations and the company marked down the value of derivative contracts. Operating earnings, which exclude investment losses, were $1,247 a share, lagging behind the $1,430 average analyst estimate compiled by Bloomberg.

Commentary by Mick Phoenix

on behalf of CA Letters

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.