Monday, July 6, 2009

Contraction is not an Improvement: Services Edition

Bloomberg reports (Bold Mine):

U.S. service industries from retailers to homebuilders contracted last month at the slowest pace in nine months, as measures of new orders and employment improved.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 47 -- higher than forecast -- from 44 in May, according to data from the Tempe, Arizona-based group. Readings less than 50 signal contraction.

The index’s third straight monthly improvement reflects signs of stabilization in housing and consumer spending. That combined with leaner inventories means companies may start expanding output again in coming months. Still, mounting job losses and stagnant wages are likely to restrain some purchases, limiting the impact of any recovery.

Below 50 = Contraction; ISM Non-Manufacturing = 47; What did the services portion of the economy do in June? Contracted.

Source: ISM


  1. A few years back, when GDP growth was slowing (but still positive), the press claimed that the economy was "weakening". Why? It was still growing, just at a slower pace.

    This is a similar situation. If we are contracting at a slower rate, it is an improvement over the last period's contraction.

    We are looking to predict an inflection point when the economy will be officially in recovery.

  2. I see your point, but I'd argue that was an incorrect statement as well if the press was making a direct comment about GDP and the economy (GDP CAN be positive, while the economy itself is slowing as measured by job loss, income, etc...). In fact when the economy "rebounds" with positive growth as soon as next quarter, I would argue that the economy isn't exactly improving.

    The reason why and a caveat I'd put on slowing GDP growth coinciding directly with a weakening economy is that the economy needs to grow by 1% to account for the growing population (i.e. GDP can be positive, but GDP per capita can be declining). Never really understood why people care if the US economy is growing if the piece of the pie is getting smaller.