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Two recent sentiment indicators point, on balance, to sustained but middling growth

Published on February 5, 2025

Gerard MacDonell

This morning’s nonmanufacturing ISM report for January was somewhat weaker than expected, primarily because the new orders series fell from 54.4 to 51.3. The current production indicator, which is not highlighted by Bloomberg and may be overlooked, was stronger in level terms, although it too fell, from 58.0 to 54.5. The average of these two measures, shown in the left panel below, which may be taken as a composite measure of activity in the service sector, fell, but to roughly the middle of the range that has held for the past couple years. This is consistent with roughly trend growth in the service sector. The value is below average for expansions, but keep in mind that growth tends to run above potential during expansions. My own sense is that service sector activity continues to run above trend, but I am reporting here on this morning’s data.

Nonmanufacturing ISM indicators

*Source: Bloomberg, FH calculations*
*Data are actual to January.*

The moderate weakness on the activity side of the nonmanufacturing ISM is (probably largely) offset by the rise of the employment indicator, from 51.3 to 52.3, a 16-month high. Along with today’s modest beat in the ADP employment indicator, it suggests little reason for the consensus to reduce their reasonably upbeat view that private employment will have been up 150k in January.

Speaking of employment, the most recent Business Trends and Outlook (BTOS) Survey from the Census Bureau, released on January 30, showed a fresh record high in the hiring intentions index in late January. We have to be careful interpreting that as only a short run of data is available here and we do not know how the seasonal work for this indicator (or anywhere else, in fairness). Moreover, the current hiring indicator went to a fresh record low.

Nevertheless, the current hiring index in BTOS has recently been a bit too downbeat relative to actual hiring, at least as we currently perceive it. (The hard data are subject to revision.) And there is gradually accumulating evidence that hiring intentions actually do provide a lead, as indicated by the right panel of the chart below.

BTOS employment indicators

Source: Census Bureau
BTOS data are actual to the second last week of January. Hard data on employment are converted from monthly to bi-weekly via repeat and incorporate consensus estimate for January.

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