The September ISM services index jumped to 57.1 from 51.4 in August. That was well above the estimate of 53.0. This is the best level since August 2015 after falling to the weakest level since 2010 in the month prior. Remember this is measuring the direction of the business mood, not the degree. New orders got back most of what it lost in August as it rose to 60 from 51.4 in August and vs 60.3 in July. Backlogs rose back above 50 at 52 from 49.5. Employment saw a noticeable increase to 57.2 from 50.7 in August and that’s the best level since last October. The only caveat with that component is just 9 of 18 industries saw an increase in employment, the same amount as in August. Export orders (only a few services businesses report them) jumped 10 pts to 56.5. Of the 18 industries surveyed, 14 saw growth vs 11 saying the same thing in August. Four saw a contraction vs 7 in the month prior.
The ISM summed up the report by saying “The comments from the respondents are mostly positive about business conditions and the overall economy. A degree of uncertainty does exist due to geopolitical conditions coupled with the upcoming US presidential election.”Bottom line, off the 6 year low in August, sentiment on services certainly rebounded and I guess the truth lies somewhere in the middle. We also heard from Markit’s version of US services and their index also improved in September off a 6 month low in August and they considered “the pace of expansion remained modest and softer than its post crisis trend, largely reflecting subdued new business gains in recent months.” Their index though sits at just 52.3. Thus, today’s good number with ISM only adds the confusing picture on the US economy but doesn’t change the fact that we’ve slowed to a 1.5% growth rate from above 2% in the years prior.
As for Markit’s survey outlook for the next 12 months, “the degree of positive sentiment eased in September and was close to June’s survey record low. Survey respondents cited fragile economic conditions, some noted hopes of a rebound in client spending after the election.” As for the is last point, it’s impossible to quantify but let’s hope so.
On the better number and add in an uber dove (Charles Evans) talking hawkish last night had the 2 yr note yield up to .85% for the first time since early June. The 10 yr at 1.72% is about to test that key 1.75% level again where it closed on the day of the UK vote. The Fed seems itching to hike and an in line jobs report on Friday may even raise the odds of a November move if they are as apolitical as they say they are.
ADP said 154k private sector jobs were created in September, 11k less than expected and a moderation from 175k seen in August (revised from 177k). Services delivered most of the gains with an increase of 151k vs 184k in August. The goods producing sector added 3k after losing 9k last month. Manufacturing jobs were shed for a 2nd month which was offset by construction.
Bottom line, as the monthly data is lumpy its best to smooth the figures out and the trend is clearly for slowing job growth over the past few years which is typical at this stage of the economic cycle. While today’s print is a 5 month low in the pace of job creation, the 3 month average is 175k vs the 6 month average of 171k but that is well off the 12 month average of 190k. Job growth for all of 2015 averaged 207k vs 234k in 2014. Friday’s estimate for private sector job growth is 170k and US Treasuries didn’t move much in response to the ADP ‘miss’ relative to expectations as the month to month relationship between ADP and BLS is specious. The Fed will also wait for Friday’s number and I dare them to raise rates in November if its north of 175k if they are so apolitical as they claim.
Peter is the Chief Market Analyst with The Lindsey Group. He is Co-CIO at Bookmark Advisors, a member of the Advisory Services Network and a regular CNBC Contributor.