ISM Services Index: Look out below!

One of the themes we have been hearing of late is that stocks, 10% off of their all time highs, are fully reflecting a recession.

That statement turns out to be, um, a tad less than accurate, as was shown by the most recent ISM non-manufacturing Index. Headlines such as Services Data Blindsides Market reveal how little the market actually had priced in even a mild recession, much less a deeper and longer one.

  The ISM’s non-manufacturing
index reflects almost 90% of the economy, according to Bloomberg. Consensus expectations of 53% were dashed, as the index plummeted to ~41.0%. to the lowest level since October 2001. If we exclude 9/11, this was the weakest reading since the data began in 1997.   

In response, all 10 industry groups in the S&P 500 declined, and the Dow dropped 220 points.

Across the board, the data released was surprisingly weak:

Business Activity Index at 41.9% (consistent with a recession historically)
New Orders Index at 43.5%  (fell 10 pts)
Employment Index at 43.9% (An 8 point fall, matching the lowest on record).
Prices Paid remained elevated at 70.7

This is particularly surprising, as we recently learned from the WSJ OpEd pages that The U.S. Economy Is Fine (Really). I haven’t figured out why those pages insist on denying reality, but its their option to live in an alternative universe (Iraq has WMDs, economy is great, etc.)

Complicating matters, the Institute for supply management released a statement saying "The
January 2008 Non-Manufacturing ISM Report On Business® is being
released early today due to a possible breach of information. This
early release time is for today’s Report only."

Here are excerpted comments:

"Recession fears taking hold as cost containment strategies have been dusted off from 2002." (Finance & Insurance)

"Business [is] slow as normal after holiday rush." (Management of Companies & Support Services)

"Oil increases affecting delivery costs and the costs of goods." (Retail Trade)

"Business is tough coming into Q1 after a very tough, unprofitable Q4. Competitive pricing is driving rates to unreasonable levels as competition is over fleeted." (Real Estate, Rental & Leasing)

"… business activity is currently lower than normal at this time." (Wholesale Trade)


January 2008 Non-Manufacturing ISM Report On Business
ISM, February 5, 2008

ISM Services Index Fell More Than Forecast in January
Shobhana Chandra
Bloomberg Feb. 5, 2008

Services Data Blindsides Market
WSJ, February 5, 2008 9:59 a.m



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What's been said:

Discussions found on the web:
  1. JJ commented on Feb 5

    The WSJ OpEd page is the only part of the paper I always skip. They really need to try harder to keep the tinfoil hat crowd from getting too much page space.

  2. E commented on Feb 5

    But Kudlow said the recession debate was over.

  3. Bullion commented on Feb 5

    Good morning.

    An Off-topic question:

    Does anyone know a site where I can monitor the spread between treasury yields (10 yr, 5 yr…) and Corporate bond of the same lengh?

    thank you

  4. kk commented on Feb 5

    I found an interesting study based on ISM readings under 50, and how the stock market performs after these readings. From 1948 to the end of 2006, when the ISM reading was below 50, as it is today, large-company stocks had an 18.3% average gain and small-company stocks had a 24.6% average gain over the next 12 months. There were 468 monthly data points whereby the ISM number was above 50 and 227 where it was less than or equal to 50.

    Of course I don’t know how this holds during an election year, with an NFC team winning the Superbowl.

  5. ronin commented on Feb 5


    Do you have a link to that study?

  6. ronin commented on Feb 5


    Do you have a link to that study?

  7. michael schumacher commented on Feb 5

    >>Of course I don’t know how this holds during an election year, with an NFC team winning the Superbowl. >>

    you forgot: increasing housing inventory, tightening lending standards, credit contraction, job creation stagnant, service sector tanking, financial companies on the brink of insolvency having to borrow money to bolster balance sheets, corporate profits dwindling, deficit expanding, gov’t spending up (based on the new budget), this little war going on in Iraq (that costs over $3 trillion-bet it would be nice to have some of that back now eh?)

    What else did you miss?

    Keep drinking..


  8. Flic commented on Feb 5

    CNBC trying to talk about the Giants and avoiding the ISM report and Recession talk since it’s obvious we are in one. Where is that Brian Wesbury idiot that claims there are no signs of a recession?? I think all the goons on TV need to gather for one big crow-eating fest on the exchange floor….

  9. Paul in NYC commented on Feb 5

    But the AFC team almost won- the game could have gone either way. The economy and the markets will not be nearly as close a call- it is definitely on the way down.

  10. Justin commented on Feb 5

    KK, this aint your average Bear boo-boo.

  11. FormerlyknownasJS commented on Feb 5

    The Fed had better hold another emergency meeting with a rate cut bomb, stock prices are dropping again…

  12. cinefoz commented on Feb 5

    Well, I guess you all now have permission to curl up and die. I, personally, will wait a month or two for more optimistic data to be released or for a true trend to emerge. Please note that most items reflect a 1 month trend. Boo!

    The ISM says the 2-1-08 Manufacturing report was above 50, reflecting the 75th straight month of manufacturing expansion. The consensus for that report was below 50. So, you cling to the bad news and reject the good.


  13. Andy Tabbo commented on Feb 5

    Enough Ben Steinery!

    CNBC actually touting their election coverage with Ben Stein. “Tonight, we have Ben Stein with Larry Kudlow.”

    What a joke.

  14. Joe Klein’s conscience commented on Feb 5

    Possible breach of information? What’s that supposed to mean? Were they afraid that someone in the know was/is shorting the market? Isn’t this move very unusual? Operation Rolling Thunder is right.

  15. michael schumacher commented on Feb 5

    >>So, you cling to the bad news and reject the good.>>

    But bullying up the market (last year) when bad news was ceremoniously pushed aside in favor of some hedge fund overpaying for whatever asset it wanted at the time is ok rather than actually having real news affect the market.

    Works both ways Cinedouche


  16. Sekar commented on Feb 5

    41.9 is fugly no matter how you slice it.

  17. kk commented on Feb 5

    “KK, this aint your average Bear boo-boo.”

    I agree Justin. 1990 was much worse.

  18. Johnny Vee commented on Feb 5

    Say hello to fed funds rate at 2%.

  19. Marcus Aurelius commented on Feb 5


    You crack me up!

    You want to talk about revisions? Lately, the revised numbers have all painted a worse picture of the economy than the numbers originally released to (foisted onto) the American public.

    Boo, back!

    You go ahead and wait for revised numbers – cling to your fantasy and reject reality. Just keep telling yourself that this isn’t happening.

    Finally, there’s no need to get ugly with the people in here because you’re scared of the truth.


  20. Stuart commented on Feb 5

    the pump monkeys and spin masters will be out in droves saying this is all good for the dollar…oh wait, here they are now. If the US is slowing, Europe is also slowing and they haven’t started to cut rates so they’re behind. Get them while the hot, the greenback, for when Europe starts cutting the euro will fall out of bed. That’s the theory anyways, incredibly already bought into by a few non-thinking autobots… complete BS spewed by self serving morons. The ECB does not have a dual mandate. Look at Australia, they RAISED rates last night. Same for them, no dual mandate. They only need be concerned with inflation and in Europe inflation is skyrocketing. The ISM figures mean the Fed is going to have to start monetizing debt this year sooner than originally thought. Monetary inflation coming to an ATM near you.

  21. Doug Watts commented on Feb 5

    I’m just curious. The news sites invariably use the adjective “unexpected” in front of any negative news item.

    For example: Stocks pulled back sharply for the second straight session Tuesday, after an unexpected contraction in the service sector rekindled investors’ worry that the economy is headed for recession.

    Why is it so astounding and unexpected that the economy might be undergoing contraction ?

  22. cinefoz commented on Feb 5

    Personally, I still believe the market is bouncing on a big bottom and will continue for another couple of weeks. This is a second buying opportunity, although I don’t think it will drop to the previous lows. I know this contradicts the pussy hand wringers who think the sky will fall any second now.

  23. D. commented on Feb 5

    The scary part is that statistics show that retirees on average spend their RRSPs in less than 10 years.

    Imagine if we go into a severe recession… companies will be forcing many into early retirement. They’ll be cashing in their RRSPs, never mind saving! How great will that be for equity markets?

    Maybe I’m too negative. The saving rate has been so low that maybe many will redeem themselves and start saving again, and this will boost equity markets.

    But wait a minute. If they are saving, doesn’t this mean they are not spending so company profits will tank?

    Maybe stocks will go up even if profits tank because so many will be saving that it wont matter how healthy companies are!

  24. Mr. Obvious commented on Feb 5

    Cinefoz….the guy that was buying all the way down in 1929…and 1930…and 1931….

    “Hey! Look, another bottom!”

    “Hey! Look, another bottom!”

    “Hey! Look, another bottom!”

    LT I’m as bullish as anyone else. But ST, there is way too much unknown bad information yet to come.

    cinefoz…let me say it now…your market call is spot on….just a wee bit early…LOL.

  25. bonghiteric commented on Feb 5

    Could you please post indicating when you belive the market has reached its inflection point to normalcy so I can go long?

  26. winjr commented on Feb 5

    “The ISM says the 2-1-08 Manufacturing report was above 50, reflecting the 75th straight month of manufacturing expansion.”

    Guess you kinda glossed over the 1/08 report, eh sport?

  27. Mr. Obvious commented on Feb 5

    Cinefoz…here is your spectacular mnfg report:

    Economic activity in the manufacturing sector expanded in January (50.7%), while the overall economy grew for the 75th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.

    The eight industries reporting growth in January — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Chemical Products; Primary Metals; Miscellaneous Manufacturing; and Machinery.

    The industries reporting contraction in January are: Nonmetallic Mineral Products; Printing and Related Support Activities; Textile Mills; Wood Products; Furniture & Related Products; Fabricated Metal Products; Plastics & Rubber Products; Computer & Electronic Products; and Transportation Equipment.

    “We are in a squeeze between supplier pressure to raise prices and customer pressure to reduce prices.” (Chemical Products)

    “The softness in residential construction has begun to manifest itself in commercial construction.” (Machinery)

    “Strong backlog now, better than last year [at the] same time.” (Furniture & Related Products)

    “Commodity prices continue to trade at all-time highs.” (Food, Beverage & Tobacco Products)

    “Customer demand was generally soft last month due to the holidays and a downturn in automobile production.” (Fabricated Metal Products)

    Not a whole lot there to hang your hat on…..

  28. cinefoz commented on Feb 5


    Excellent point. The prior report for December dipped below 50 from above 50. Then, the most current ISM manufacturing report for January rose back to above 50. Prior to that, it was above 50 for a long time.

    So far, it looks like the pussy patrol is performing champion hand wringing. You poor babies. Are your diapers dirty?

  29. Justin commented on Feb 5

    KK, In 90, it was mostly Texas real estate, today it is – California, Florida, Arizona, Ohio, Nevada. It is going to get alot worse than 90…

  30. michael schumacher commented on Feb 5

    and just when people thought it was going to be safe to get back into the water again in 2009…….

    from the Calculated Risk site:

    “Ms Bair warned of a new wave of payment resets starting in 2009 affecting “Alt-A” loans – loans to ­borrowers with better credit histories than subprime ­borrowers.”

    Watch the video and see how Wilbur Ross gets schooled by a public official……great stuff.

    Oh yea and this guy was the source of the rumor that pushed up the market 600pts…..sounds really well-versed in his business…….NOT

    he also owns a very large servicing business that seems to benefit very handsomely should his socialized take-over actually goes through.

    Riddled with conflicts.


  31. Street Creds commented on Feb 5

    Actually in the 90’s every bank in Texas had new owners.

  32. Pat G. commented on Feb 5

    The only component listed as “increasing” in the ISM report was prices (inflation). If the FED can manage to steady the ship those prices will be past on to you and I.

  33. michael schumacher commented on Feb 5

    So does anyone else see the following setup happening:

    We sell off(asset sales from big banks) at the start of the month for a few weeks……then equities get the “value” pump from the machine and they continue to buy up the market for the remainder of the month. Thus the market ends up only really losing a little bit but when taken into context of the whole month (not so good). But it appears orderly…

    Why do I offer this up??

    It supports the notion that if the public (who looks at it’s statements each month) won’t sell if the market is slowly going down as opposed to the moves we see within the given month.

    Look at your statements from December EOY to the EOM January statement.

    Doesn’t look too bad…..does it?
    But we all know what the movement was within January…..those who do nothing more than look at EOM statements are clueless to it all.


  34. metoo commented on Feb 5

    “cinefoz…let me say it now…your market call is spot on….just a wee bit early…LOL”

    Much like most of the posters on this site for the last 3 or 4 years

  35. Al Czervik commented on Feb 5

    Geez, I cut back on going for massage therapy and started going a little longer between haircuts but I didn’t think it was going to fuck up the whole service economy. Sorry about that.

  36. kk commented on Feb 5


    The 1990 S&L crisis was nationwide in scope, although the heaviest concentrations were in TX, LA, OK, AZ, & CA, with the commercial real estate market taking the largest hits. The amount of S&L’s were cut in half in the years following the crisis, and many commercial banks were also on the ropes. At the present, the current situation in the Southwest doesn’t compare in magnitude with what went down in 1990, but I respect the fact that it could get worse.

    I recall going to those RTC property auctions in 1991-1992, with winning bidders buying assets at 20-30% of cost of development, and not understanding how they could buy when things were so bad. It turned out that they were the buys of a lifetime, and changed the way that I look at situations like the present. This is not a market call, as those things are for the trader types.

  37. winjr commented on Feb 5

    “So far, it looks like the pussy patrol is performing champion hand wringing.”

    Hilarious, dude. What we’re doing best of all at the moment is making cash hands-over-fist.

    We’re also more adept at getting our facts straight. Until you can say the same, my suggestion to you is to pay a bit more attention to detail before flappin’ your yap here.

  38. E commented on Feb 5

    75 months sounds suspiciously like 6 years or so, which is the business cycle.

    I would suggest that people who call others “pussies” for their analysis of economic conditions in a blog message are not the types capable of rational, unemotional truth seeking. I think it’s time everyone stopped feeding the troll, who by the way used to cheerlead as Capital Gains on Kudlows blog.

  39. michael schumacher commented on Feb 5

    Speaking of banks. Anyone got a thought about what this means? Negative non-borrowed reserves can’t be good!

    What it means is that if a bank run were to occur (not entirely out of the question given the current “issues”) than the banking system would be closed down and out of money to repay depositors. Since they have taken the TAF amount and placed it squarely in the fractional reserve portion… shows (very clearly) that they do not have the cash to deal with ANY large scale withdrawals.

    Thanks greenspan and rubin

  40. cinefoz commented on Feb 5

    Why is it that perpetual hand wringers who ALWAYS frighten and OVERREACT at the hint of possible bad news get upset at being referred to as pussies? Live in perpetual fear of the sky falling ANY MINUTE NOW, be a pussy.

  41. E commented on Feb 5

    That federal reserve chart means that banks have put up their shaky MBS as collateral on short term loans from the Fed, in order to maintain liquidity. This is what the Fed is for, and it is working – banks have reserves, and are able to extend credit, which keeps the wheels of the economy moving.

  42. E commented on Feb 5

    cinefoz, I don’t really care who you call a pussy. My point is that it is a reflection on the source, not the target.

  43. Guy M. Lerner commented on Feb 5

    Hi Barry: The ISM number certainly was weaker than expected, but could the market’s weakness today be Wall Street’s angst over an Obama victory at the polls? Your thoughts….

  44. Paul in NYC commented on Feb 5

    Wall Street should not be afraid of an Obama victory. Nobody running is a threat to anything immediately- no significant tax changes can take place until 2010.

  45. scorpio commented on Feb 5

    i pray that someone is a threat to the renegade tax cuts for the top 1% under Bush regime. i dont think Hillary is a threat. Obama might be. Obama-Democratic Congress should give Kudlow capitalists a bit of pause. i am speaking as Obama voter 100% in cash (meaning i’m gonna make it into top 1% the hard way, as others drop out. yeehaw)

  46. Todd commented on Feb 5

    Ah, but Cramer was very reassuring with his ”whoever heard of the ISM Services Report?”….nice case of denial after going bullish on Stop Trading segment CNBC at 1380 SPY last Tuesday afternoon. To think that I thought the US is now a service oriented economy with a depleted manufacturing base.

  47. Mike commented on Feb 6

    Cinefoz, I think we all understand your point of view now and no longer require another post that mentions “hand-wringing” and/or “pussy/ies”.

    Can I also suggest that you might actually be better off getting involved in any one of the ongoing mutual masturbation sessions that are running at the myopically “perma-optimist” blogs instead?

    After all, if all the people here disagree with your view then they are just offering you a chance to make money…

  48. bobby commented on Feb 6

    Although I am bearish on the medium term prospects for the market, I wouldn’t read too much into this. The ISM has been around for less than 20 years and is based on a survery (human psychology plays a big role.)

    Also, the ISM track record is pretty poor (look at March ’03) and there is a lot of noise in the data series. I think the market wanted to sell off, and the ISM was a good excuse.

  49. Michael Donnelly commented on Feb 7

    Was at a lunch at the Philadelphia Fed yesterday and one of the participants is a PM and permabull, I’ve known him for about 8 years, I think he is related to cinofez.

    Anyway he told me there’s a rumor the ISM number was miscalculated and should be ignored, and was suspicious due to the early release.

    Hey gotta go with whatever confirms your already pre-existing view, right ??

  50. DT commented on Feb 8

    More folks react to numbers without really diving into what it really means. There are some areas of the service sector showing promise.

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