Tuesday, August 05, 2003

So, the Institute for Supply Management is telling us today that, in the words of the AP, "Service Economy Sees Big July Gain".
The Institute for Supply Management said its non-manufacturing index moved to 65.1 from 60.6 in June and 54.5 in May. Readings above 50 indicate growth in activity, while those below 50 point to contraction.

The strength of the report served as confirmation for economists that the economy is finally embarking on a path of sustained economic growth.
Let's hear the rest of the story.

This ISM Non-Manufacturing Report on Business puts two components of the overall index in the driver's seat: new orders (66.9) and inventory sentiment (60.9). Backlog of orders (54.5) and imports (54.0) weren't doing too badly either.

Now again, as with the ISM Manufacturing Report out last week, what's driving the big numbers in this report is newfound "confidence" and predictions of the future. Note the two biggies are future orders and "sentiment" about whether inventories are too big or not. Maybe the future really will be rosy, but as we all known, it aint the future just yet.

Two interesting numbers are buried in this report. Non-manufacturing employment turned in a rather unimpressive figure of 50.7, but it was up from June's 50.3. The employment index for manufacturing is still trapped at 46.1. So we have a few more service jobs being added, but stress "few".

The other interesting number was on prices. In June the index stood at 51.4 and now in July it's fallen to 50.6. Thus there is notable disinflation in the services sector and we're hovering just above outright deflation in US services.

Pundits have long thought that even if there is deflation in goods flooding the US market from East Asia, the strong bias in the US toward services which are supposedly much more impervious to falling prices will always rescue the country from overall deflation. Stephen Roach questioned this conventional wisdom back in 2002 and he looks to be largely right. Piggy back this onto a story from USA Today that
office and professional jobs are being shipped out raising the specter that skilled white-collar workers could face the same devastating job losses that decimated the manufacturing industry
and you get a nasty little snapshot of a possible US economic future.

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