US ISM nonmanufacturing index rebounds to the best level in nearly a year - RBS

Research Team at RBS, notes that after sliding in August from 55.5 to 51.4 (a level that has historically foreshadowed recession), the US ISM nonmanufacturing index rebounded strongly in September, climbing to 57.1, the best level in nearly a year.

Key Quotes

“Importantly, a rebound was seen across all key activity gauges. The new orders and production measures both rose by more than eight points. In addition, the employment barometer (which does have a statistical correlation with payrolls) jumped from 50.7 to 57.2 (also the best level since October).

The strength in the employment gauge introduces upside risk to our forecast (+175,000) for Friday's jobs report. We calculate an all-economy ISM employment index (based on the two ISM surveys’ employment components); that index (to 56.4 in September from 50.4 in August) signals a healthy surge in payrolls in September. Admittedly, the monthly relationship between the payroll-weighted employment ISM index and reported payroll gains can vary, although the index usually captures the trend in payrolls.

While we are certainly relieved to see the bounce in September, the magnitude of the spike (as well as the slide in August) is probably best taken with a grain of salt. The monthly change (up 5.7 points) in the level of the ISM nonmanufacturing index in September offsets the declines in July (1.0 point) and August (4.1 points). It is not clear what drove the index down sharply in August and up sharply in September (perhaps a delayed negative reaction to the Brexit vote which then dissipated?).

In any case, looking through the month-to-month volatility, the average level of the ISM nonmanufacturing index over August/September (54.2) is not much different that the average reading (54.6) recorded over the first seven months of the year. However, that level is noticeably weaker than the average reading recorded in 2015 (57.1). Thus, while any concern over an imminent recession has been mitigated, these data are still consistent with a downward shift in the pace of growth this year.

In September, 14 of 18 industries reported expansion. Comments from respondents were mostly positive about business conditions, though the text notes that "A degree of uncertainty does exist due to geopolitical conditions coupled with the upcoming U.S. presidential election."