The ISM Non-Manufacturing Index (NMI) Went into the Tank in January

From the Institute for Supply Management:

Business activity in the non-manufacturing sector contracted in January for the first time in 58 months, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Managementâ„¢ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Hotels Corporation. “The new NMI (Non-Manufacturing Index) at 44.6 percent indicates contraction within the non-manufacturing sector for January 2008. Non-manufacturing business activity contracted for the first time since March 2003,” Nieves said. He added, “The New Orders Index contracted to 43.5 percent, the lowest since October 2001. The Employment Index contracted to 43.9 percent, the lowest since February 2002. The Prices Index decreased to 70.7 percent in January, indicating a slight slowing in price increases for January. According to the new NMI, only three non-manufacturing industries reported growth in January. Members’ comments in January indicate that weakness in the economy coupled with increased costs have negatively affected their business. Members have also indicated that they are experiencing inflationary pressures. The overall indication in January is that non-manufacturing has come to the end of a long-term period of growth and has contracted for the month of January.”

Ouch — This is your basic bucket of cold water smack dab in the face.

The NMI is apparently a new or newly-revised index. Last month’s supposedly comparable number was 53.9, but I was unable to find any reference directly comparing last month’s figure to this month’s — which would be helpful, given the extent of the drop. AP says that last month’s revised comparable reading was 54.4 (this is wrong — see UPDATE below).

So let’s take it as a given from today’s report that the Non-Manufacturing portion (i.e., “most”) of the economy went into contraction mode for the first time in nearly 5 years (although that’s tough to reconcile with ISM’s statement on Friday that introduced the Manufacturing Report — namely, that the economy expanded in January for the 75th straight month, with the Manufacturing portion of it expanding only slightly with a reading was 50.7. Those two statements appear not to be able to co-exist).

The big question, of course, is whether NMI will remain in contraction or bounce back. I would guess that the answer is that it will bounce back, but only to a neutral level. I would hope that this will scare Congress straight into getting the stimulus package passed, even if stubborn Senators can’t get all the goodies they’d like. Oh, and the Fed will probably drop rates yet again.

What a missed opportunity — If President Bush had pushed to prevent the huge tax increases scheduled to kick in starting in 2010 from happening instead of only working on the stimulus package, we might be having a discussion about how that keeping marginal tax rates the same incentivizes the economy more than any short-term stimulus package ever will. Given the current political climate, I think it might have had a decent shot as passing.

My (admittedly of limited value) ear-to-the-ground sense is that we’re going to do a 49-51 or so in the NMI for the next couple of months, and not much better.

_______________________________________________

UPDATE, 2PM: Just got off the phone with the ISM’s spokesperson, who said that she was asked earlier in the day whether or not the reported drop is the largest ever. Answer: It is.

Another point: The NMI is indeed a brand-new figure that has been added to the Non-Manufacturing Report, so there is no truly comparable prior-month figure (contrary to what AP is reporting). Until December, the overall number that was reported was the Business Activity Index, which is still computed. That number dropped from 54.4. to 41.9, or 12.5 points. Ouch.