ISM Service Index Posts Slight Decline

The ISM non-manufacturing index pulled back slightly in October as the PMI dropped from 50.9 to 50.6. The index remained above the 50.0 threshold and represented the second consecutive monthly expansion.

The consensus expected the index to have grown to 51.5.

The decline in the ISM non-manufacturing index isn't too worrying as the two main components, production and new orders, posted positive increases.

Business production increased by only 0.1 to 55.2, but the change was faster than what occurred in September. New orders posted a much stronger gain of 1.4 to 55.6.

As long as production and orders continue to increase, we should expect to see expansion in the sector.

Inventories remain a problem and a rebound doesn't look too likely in the near future.

Inventories have contracted for 14 consecutive months and in October the contraction sped up as the index fell from 47.5 to 43.0. Inventory sentiment increased by 1.5 to 63.5 and signaled that firms still believe they have too much inventory on hand.

Inventory sentiment is directly related to expected consumer demand, and until firms truly believe demand will increase sentiment will remain too high. Fortunately for the economy, increases in inventory sentiment rarely lead to an actual change in inventory levels.

Employment levels contracted for the 18th consecutive month as the index fell from 44.3 to 41.1.

Prices remain volatile and entered an expansion phase as the index increased to 53.0.

Deflationary pressures continue to outweigh inflationary concerns and the price index should fall over the next few months.