The Institute for Supply Management (“ISM”) was founded in 1915 with the goal of serving and guiding the supply management profession. The monthly ISM Manufacturing Report On Business has been published since 1931. In 1998, the organization added the ISM Non-Manufacturing Report On Business, often referred to as the ISM Services Report to help differentiate the two. Together, these reports (and their associated indexes) are widely followed and respected indicators of US business activity.
On Monday, the ISM Manufacturing Report claimed the manufacturing sector expanded for the 31st consecutive month and the overall economy grew for the 74th consecutive month in July. The report consists of eleven distinct indexes where a reading above 50% generally indicates that segment is expanding, while values below 50% typically indicate it is contracting. The Purchasing Manager’s Index (“PMI”), perhaps the most widely followed portion of this report, registered a reading of 52.7% in July. New Orders, which gives a peak at the future, registered a robust 56.5% for its 32nd monthly gain. The Prices Index went the other direction, registering just 44.0%, down from 49.5% in June.
Today, the ISM Non-Manufacturing Index (aka the Services Index) posted its 66th consecutive increase with a 60.3% reading for July. This is also the highest reading on record for this particular composite which began in 2008. It too has a Prices Index, but it went the opposite direction from the Manufacturing Prices. The Services Prices Index climbed to 53.7%.
The differences are a function of what constitutes a commodity for a manufacturing versus a services company. The Manufacturing Survey reported no commodities with increasing prices while the Non-Manufacturing Survey reported price increases for bacon, chicken, corn, dairy, diesel, eggs, fuel, gasoline, labor, lettuce, produce, soybean oil, and telecom services. As for commodities with lower prices, the Manufacturing Survey listed aluminum, brass, copper, nickel, stainless steel, and steel. Some respondents to the Non-Manufacturing Survey reported price drops for dairy, diesel, and gasoline. It is not clear if the simultaneous “up in price” and “down in price” reports for these items was due to timing within the month or geographic location. Commodities named as being in short supply included construction labor, services labor, eggs, and egg whites – all from the Non-Manufacturing Survey.
Generally, when the economy is improving, the associated commodity prices tend to rise as demand increases. This seems to be the case for the services sector. For the manufacturing sector, there appears to be a discrepancy as prices continue to fall even as sales, purchasing, and production activities are increasing.
Commodity-based ETFs and ETNs tend to support the Manufacturing Survey’s view of falling commodity prices, as 98% of commodity funds are in distinct downtrends. Maybe the data would be different if there were funds tracking construction labor, services labor, and eggs. Reconciling the differences requires additional research, but the overall data gives the service sector an edge over manufacturing.
Consumer Discretionary climbed two places higher to grab the top ranking, thanks to renewed strength among retailers. Consumer Discretionary was on top 21 weeks ago, and it remained highly ranked during the interim period. Health Care, having held the leadership spot for the past eleven weeks, landed in second place today. Consumer Staples was pushed one spot lower to third, and Financials held steady in fourth. Real Estate and Utilities both flipped from red to green as they moved a notch higher in the rankings. Technology slipped two places lower, but the sector is leading the upside action in today’s market, which may allow it to move back into the upper half by next week. Telecom showed the largest momentum improvement this week, boosting its score by 15 points and climbing a notch higher. Industrials slipped to ninth, while Materials and Energy continue to bring up the rear. Materials was able to reduce its negative momentum, but Energy just fell deeper into the red again this week.
Three pairs of categories swapped ranking positions, but the net result is not much change in the overall complexion of the rankings. Large-Cap Growth ascended to the top as Mega-Cap slipped to second. Small-Cap Growth, Large-Cap Blend, and Mid-Cap Growth all managed to improve from having slightly negative to slightly positive momentum and kept their ranking positions in the process. The bottom six categories all showed minor momentum improvement over the past week but remain in negative territory. Mid-Cap Blend and Large-Cap Value swapped places, as did Mid-Cap Value and Micro-Cap. Micro-Cap has plunged from first to tenth in the span of five weeks. Small-Cap Value is on the bottom for a second week.
Seven of the eleven categories have the same ranking as a week ago, while the four that changed only moved one position. The top-four spots are unchanged, although three of them produced enough of a momentum improvement to move to the positive side of the ledger. Last week, only the Eurozone was on the positive side, even if it couldn’t muster anything better than 0+ reading. The Eurozone heads up the list again with Japan, the US, and EAFE close behind. This week is it EAFE that barely managed to get itself on the plus side of zero. The UK had a good week, improving its momentum by 10 points and moving ahead of World Equity to join the top-five. Pacific ex-Japan, Canada, and Emerging Markets continue to struggle with their steep downtrends. Latin America and China are on the bottom, although Latin America was able to move slightly ahead of China this week. However, both are so deep in the red that trying to read anything into their relative positions is pointless.
“The ISM number was a blowout number. It helps reinforce the hawkish comments we got from [Atlanta Fed President] Lockhart, which put September back on the table more firmly for higher rates.”
said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc.
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