Talk about mixed messages.
Just 48 hours after the Institute for Supply Management reported that manufacturing activity in September was much stronger than expected, ISM today released its September survey for the services sector only to contradict Monday’s encouraging news. “ISM’s Non-Manufacturing Business Activity Index in September dropped to 53.3 from August’s 65, indicating a slower rate of growth of activity in September,”the press release advised. Although 53.3 still indicates growth, the index fell last month to its lowest reading since April 2003.

Still, it’s unclear if the drop is a harbinger of things to come, or just a one-time event. More data, as always, is required. Meanwhile, thanks to the hurricanes, and a few other gremlins, economics suffers a less-than-textbook existence these days. Whatever the future holds, the services sector promises to remain on the frontline of any trend change if for no other reason than it represents the lion’s share of economic activity in the U.S. relative to manufacturing.
On that score, pessimists will pay close attention to the fact that real estate, business services and finance & banking are among the groups within the services sector report “decreased activity” to ISM last month. Such news seems destined to fuel speculation that the real estate market’s bubble, if in fact that’s what it is, is set to burst. That, in fact, seemed to be the fear driving today’s tumble in shares of home builder Hovnanian Enterprises Inc., which fell 91 cents to $48.37. A noteworth decline considering that the company reported that the dollar value of its new contracts rose 68% last month. Alas, bullish news must pass through Mr. Market’s increasingly skeptical eye on matters of property booms.
Even a more moderate reading of today’s ISM report has to consider the prospect of slower economic growth. “Many [ISM] members’ comments expressed concern about the continuing increase in oil and gas prices as well as Hurricane Katrina, and their impact on prices and economic activity,” Ralph Kauffman, chair of ISM’s nonmanufacturing business survey committee, said in today’s accompanying press release.
Optimists will point out that while the services sector has slowed, it’s still growing. That’s just what Kauffman emphasized. Again, quoting him from today’s prepared statement: “The overall indication is continued economic growth in the non-manufacturing sector in September, but at a slower rate of increase than in August.”
One economist was a bit less forgiving in assessing the news: “The services economy had the wind knocked out of its sails in September,” Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York, explained today to Bloomberg News.
Putting a positive spin on the prices paid in the services sector was materially more challenging. Indeed, prices paid last month rose materially faster in September vs. August, reaching the highest level recorded since the ISM’s non-manufacturing survey began in 1997. Adding salt into the price wound, ISM also reported that the percentage of members reporting higher prices rose to 58% from 36% previously. All of which suggests that pricing pressures are on the march.
Perhaps the warning signs embedded in today’s ISM report will pass, perhaps not. That, in short, is the question of the moment, namely, “If and when manufacturers and businesses decide they have to pass through these rising prices to consumers,” Jerry Zukowski, deputy chief economist at Nomura Securities International Inc., told AP today via MSNBC.com. “A lot of it is energy. We are clearly not out of the woods in terms of these price pressures.”
The bond market, however, is still willing to withhold judgment, one way or the other. The yield on the 10-year Treasury slipped only slightly today, closing the session at 4.35%. The stock market, by contrast, took the news from the ISM harder. The S&P 500 shed 1.5% today, dropping to its lowest level in months.
So, who’s right? Monday’s manufacturing report? Today’s services numbers? The bond market? The stock market? Consensus may be lacking, but choice stretches to the stars.