Last week, we looked at the ISM New Orders Index with an eye on what it can tell us about expansion or contraction in manufacturing and services. Now let’s dig deeper into another ISM index you should be watching on a regular basis for what it can reveal about the labor market, a major cost driver for both indirect and many direct spend categories; the ISM Employment Index.

Most economists expect the unemployment rates in the US to continue to climb through the end of the year, and a closer look at the ISM survey data for both the manufacturing and non-manufacturing sectors certainly backs that forecast. In both cases, an index reading above 50 means that the sector is in a hiring mode, while a reading below 50 means that the jobs sector is declining. As the graph above indicates, the employment outlook has been dim for more than 18 months, with large declines beginning in the late summer of 2008.

While the upward trends in the graph above are encouraging, it is important to remember that both index readings remain in the low forties, well below the benchmark for expansion. The ISM Employment Index tends to lead the data from the Bureau of Labor Statistics, so don’t be surprised if the numbers above hit 50 before the broader unemployment data starts to decline.

What does this mean for labor as a cost driver in the short to mid-term?

Well as we’ve pointed out before, when the unemployment rate is above 6% companies can often negotiate significant cost savings on goods where labor is a major cost driver. And although unemployment rates have regional and industry components, it’s safe to say we’re not going to see sub-6% for a long time in most sectors. Couple that unemployment data with the ISM Unemployment Index for its expansion/contraction trends and you’re armed with strong data to help you negotiations.

Next up, we’ll cover the ISM Manufacturing Orders vs Inventory Index (my personal favorite).

Pat Furey is a Senior Category Manager in Ariba’s Global Sourcing Organization. Pat leads the team of global category managers covering direct materials and indirect goods and services.