ISM: Service Sector Activity Strongest Since August 2005

In another positive sign for the U.S. economy, service sector activity is the strongest in more than five years, according to the Institute for Supply Management. Its overall Non-manufacturing Activity Index (NMI) increased 2.3% to 59.4% -- the highest since ISM began calculating the index in 2008. Its components improved broadly, which is great news for the recovery.

Here's the summary chart from ISM, with December's results added:

ism services 2011-01 v3.png

NMI didn't just rise in January: its 2.3% increase the biggest in one month since August 2009. It has now grown faster five months straight. You can see why it did so well by looking at the direction of change column -- most positive indicators are growing, and many are growing faster.

Let's consider a few of these key components. As already mentioned, non-manufacturing business activity was the strongest since August 2005. The sector has been improving for the last 18 months, and growing faster for four months straight.

One thing likely helping to drive that improvement is new orders. Their index was also relatively high in January -- the best in seven years. Further down in the chart, you can see that a growing backlog of orders and additional new export orders are also helping these firms.

At this point, however, all this business activity needs to bring some new jobs. Today's report indicates that it did in January. Its employment index also increased. It hit a new high not seen since May 2006.

Supplier deliveries and inventories provide a little less clarity on the sector's direction, however. With deliveries and inventories falling, this implies that these firms are sensing less demand in coming months. While this is likely seasonal, it throws the aggressive hiring narrative into question.

Reviewing the ISM report, there's little doubt that the service sector is improving. These firms' enhanced business activity should produce more jobs. Whether they hire a large or small number of workers, however, depends on how the broader economy moves forward.

Note: I have decided to stop color-coding the ISM components. Many of them provide mixed verdicts about the overall economy, like inventory, imports, and deliveries. So it could be misleading to simply call their results good or bad.