U.S. Markets close in 6 hrs 15 mins

Must-know: Why did the service sector report a pick-up in May?

Brent Nyitray, CFA, MBA

May 2014 Institute for Supply Management surveys: Key points (Part 3 of 4)

(Continued from Part 2)

The Institute of Supply Management Non-manufacturing Index assesses the state of non-manufacturing business in the U.S.

The Institute of Supply Management (ISM) Purchasing Manager’s Index (PMI) is similar to the other regional PMI indices, but it covers the entire country. It’s the sister index to the ISM Manufacturing Purchasing Managers Index. The non-manufacturing ISM looks at various business indices, like new orders, production, employment, supplier deliveries, inventory, customer inventories, prices, backlog, exports and imports, and capital expenditures. A reading over 50 means the sector in question is generally expanding. Office REITs like Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), SL Green (SLG), and Highwoods (HIW) are particularly affected by the services sector.

Services activity rebounded in May in tandem with the ISM manufacturing index

The index showed that overall activity in the non-manufacturing sector increased for the 52nd consecutive month and the pace of growth is accelerating. The overall index rose from 55.2 in April to 56.3 in May. The business activity index hit 62.1% and the employment index increased from 51.3 to 52.4. The ISM Manufacturing Index showed an increase in employment. Seventeen of the industries reported expansion. The best-performing sectors were construction, wholesale trade, and management or support services. The only industry reporting contraction was mining. The elephant in the room, of course, will remain Obamacare and how it impacts corporate cost structures going forward.

Some key quotes from the survey

  • “Market is picking up with large construction projects for the second half of the year.” (Construction)
  • “Business activity remains steady. There continues to be pressure from rising material and services costs.” (Professional, Scientific & Technical Services)
  • “Backlog remains strong. Retail business is up. Project based business is also up.” (Wholesale Trade)
  • “Business is steady with earnings and growth in line with expectations.” (Finance & Insurance)
  • “Steady activity in sales and improved margins.” (Retail Trade)

Continue to Part 4

Browse this series on Market Realist: