Story Highlights:
>The US ISM non-manufacturing index rose to a higher-than-expected 53 in February. >Any reading above 50 indicates expansion in the services sector, and this is the fastest pace of growth for the index since October 2007. >Though only 4 out of 18 industries reported increased activity, the report suggests growth is strengthening the US service and retail sectors. >This is another sign we’re in a broad-based recovery, and the fact the media is casting this as insignificant or neutral is additionally bullish. ________________________________________________________________
Wednesday’s major economic release delivered some a bit of good news that was received with some indifference, or even cast as a negative-which is largely what you’d expect in a bull market. The Institute for Supply Management’s (ISM) non-manufacturing index rose to 53 in February (any reading above 50 indicates expansion)-higher than the expected 51 and at the fastest pace since October 2007. Pretty darn good. Critics will likely point out just 4 out of 18 industries reported increased activity while 10 reported decreased activity (the other 4 were unchanged).* That may not sound great on the surface, but the overall, the report suggested growth is strengthening in the retail and services sector.
There are those who fret the popular storyline about the “decline of the US manufacturing sector” (which is doing fine, by the way). Perhaps the focus on manufacturing is simply out of nostalgia (or a failure to realize that the US is still the world’s largest manufacturer.) But “services” account for about 80 percent of US jobs (not including farm workers)-and improvement here is confirmation the US recovery is on surer footing. And no, not all services industries are reporting expansion yet-but that’s normal. Not all economic areas move in lockstep.
More important, the release shows both business activity/production and new orders are growing faster. These are key because they suggest firms may be in the early stages of rebuilding their lean inventories to meet demand. Indeed, the ISM report showed inventories contracted faster. Contracting inventories aren’t always a great sign. In fact, it can be a sign firms are hunkering down in anticipation of tough times ahead. And that’s what we saw as we headed into the recession-firms got exceptionally lean and mean, thanks to advances in supply chain management technology, among other things. Now, they aren’t working through backlogged warehouses; instead, falling inventories are signaling increased demand-customers whisking items off shelves. Which in turns means firms must restock and suppliers increase production-all which spur more economic activity.
This bit of overall positive news was met by crickets today. (Or, more oddly, heralded as not so great news- before the report was released!) That’s just more of the pessimism of disbelief at work. So tell those crickets to pipe down. This is one to cheer about.
*Fisher Investments Research
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