Weak ISM Non-manufacturing Index Hurts the Dollar

Although currency traders await the next rate increase by the Fed, that increase might be delayed due to the economy. Bloomberg reports that the dollar drops due to a weakening service sector.

A gauge of the dollar dropped by the most in five weeks after a report showed America’s service industries expanded in August at the weakest pace in six years, damping the outlook for higher U.S. interest rates.

The U.S. currency fell against most of its major counterparts, including high-yielding peers such as the Australian dollar and South African rand. The Institute for Supply Management’s non-manufacturing index slumped to 51.4, the lowest since February 2010, from 55.5 in July, a report from the Tempe, Arizona-based group showed Tuesday. That follows a factory survey from the group earlier this month, which showed manufacturing unexpectedly contracted.

As indicators of the U. S. economy weaken so do chances of an early rate increase by the Fed. In short a weak ISM non-manufacturing index hurts the dollar. How strong an indicator is the ISM index?

Institute for Supply Management

According to the ISM web site:

ISM research impacts the global economy. The ISM Manufacturing Report On Business® is one of the most reliable economic indicators available. Published monthly since 1931, the report includes the Purchasing Managers Index (PMI), developed in 1982 with the U.S. Department of Commerce, which measures new orders, production, employment and supplier deliveries. The ISM Non-Manufacturing Report On Business® debuted in 1998.

Just what does the ISM manufacturing or non-manufacturing index tell us? According to a report from George Washington University what the ISM tells us about the coming state of the economy.

The  main  value  of  the  ISM  survey  is  in  its  anticipation  of  later  official  data,  because  it  is  published  significantly  earlier  than  the  official  data.  For  both  private  economic  actors  and  public  policymakers,  there is value in learning something about the state of the manufacturing sector two to four weeks before the first official measures are published.

ISM non-manufacturing index comes from four equal parts of seasonally adjusted business activity, new orders, employment and supplier deliveries. An index number of over 50 indicates growth or expansion and an index below 50 indicates contraction in the sector. The currently weaker ISM non-manufacturing index is still above 50 at 51.4 but down from July when it was 55.5. The implication is that the service sector of the economy is slowing down and taking the U.S. economy with it.

There Goes the Interest Rate Increase

The Fed has been ever so cautious in raising interest rates, making it clear that their decision to raise rates each time will be data driven. Government data that comes in a couple of weeks after the ISM index is what they will be watching but the Forex market is taking its cue from the ISM index and assuming that the Fed will see weak economic data and forego any current rate increases. Of course a slightly weaker dollar may help U.S. exports and the economy in general, which will eventually mean a healthier economy and higher rates. The key word is eventually.