Tuesday, October 05, 2004

How doth the soft patch expand? Let me count the ways . . .
The Institute for Supply Management's non-manufacturing index fell to 56.7 in September from 58.2 in August, below Wall Street predictions for an increase to 59.0.

A number above 50 indicates growth, while a figure below that threshold denotes contraction in the sector, which accounts for about 80 percent of the U.S. economy.

"The ISM non-manufacturing index was a little softer than expected but some of the important components still look pretty good, particularly the employment component," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, Missouri.

The ISM survey's employment index rose to 54.6 in September from 52.5, while the prices paid index fell to 67.1 from 70.0.
First, let's absorb the degree to which this report deviates from expectations. Wall Street expected a 0.8 point rise; what it got was a 1.5 point fall. That's a 2.3 point disappointment -- a big difference.

Second, this is the second monthly decline in the ISM services index in a row. The only good news in this report was that services employment rose markedly. However, in light of all the other mediocre to outright bad news, how long will that last? Especially in light of all the planned job cuts announced in September?
"Historically, the period from September 1 through December 31 is when we see the heaviest downsizing and this year appears to be on track to repeat that trend," said John Challenger, chief executive officer of the [employment consulting firm Challenger, Gray & Christmas Inc.].
Third, the big fall in services inflation should raise eyebrows. The prices index fell 2.9 points to 67.1. This was the third month in a row in which the ISM measured disinflation in services, on the heels of manufacturing disinflation over four out of the last five months. Considering services are the only source of inflation in the US economy, this is another cause for concern that the US is again flirting with deflation as we did in late 2003.

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