The Institute for Supply Management’s non-manufacturing index for February rose to 57.6, up 1.1 points month on month, better than the consensus expectation and its best reading since August 2015. On a 3 month moving average basis the index scored 56.8, up 2.7%. However, on year on year comparison the index was down 2.3%. Momentum (defined as 3 month minus 12 month), was positive 5.6%. Overall, the details were encouraging as new orders and employment both moved up.
The ISM non-manufacturing survey measures the rate and direction of change in activity in non-manufacturing industries. Surveys are sent to more than 370 purchasing managers in 17 industries. Survey responses reflect the change in the current month compared with the previous month. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary, (Figure 1).
It is important to keep an eye on the non-manufacturing index since it accounts for 88% of GDP which has a proven correlation on demand for steel products. Household balance sheets are in good shape and consumers are expected to continue to lead economic growth.
New orders increased from 58.6 to 61.2, the highest since the August 2015. The employment index was up for the second consecutive month, coming in at 55.2. The inventory index crossed the neutral threshold, rising to 52 from 48. The employment index indicates that February was another solid month for job growth. The Trump administrations plans for fiscal stimulus coupled with potential tariffs on imports is having a positive impact on the ISM manufacturing surveys. This is boosting measures of business and consumer surveys which is yet to materialize in the hard economic data. At this point it appears that the fundamentals continue to be supportive for the non-manufacturing segment of the US economy.
At Gerdau we closely monitor the ISM non-manufacturing index since it is an excellent barometer of the present strength as well as a window on the likely short-run future of US non-manufacturing economy. We have seen that a strengthening non-manufacturing economy translates to improved steel consumption.