The ISM non-manufacturing survey measures the rate and direction of change in activity in non-manufacturing industries. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary. The March Institute for Supply Management’s non-manufacturing index slid 2.4 points to 55.2, a little lower than the consensus expectations.
On a 3 month moving average basis the index scored 56.3, up 4.9%, three month year on year. Momentum (defined as 3 month minus 12 month), was also positive at +6.3%. Figure 1 shows the composite index from 2003 to present. The chart shows that the index has been in the expansionary zone continuously since January 2010.
Looking into the sub-indexes, we see that the reasons for the drop in the composite index stems from a fall in new orders from 61.2 to 58.9 m/m, a decline in the employment index which came in at 51.6, down 3.6 points m/m, a slight drop in backlog and a 3.5 point fall in inventory levels. Sub-indexes posting m/m gains included both imports and exports, each up 5.5 points to record 56.5 and 62.5 respectfully, (Table 1).
Survey results have been strong over the past several months so this month’s report should not be too worrisome. Both consumer and business confidence are strong with each expecting a lot of economic stimulus to be forthcoming from the Trump administration. Trump has promised tax cuts for both corporate and personal accounts as well as fewer regulatory hurdles for businesses to deal with. In addition there appears to be wide-spread support for a large scale infrastructure bill on the horizon. Further evidence of the underlying strength in the US economy is evident from today’s (April 5th), ADP jobs report which surprised to the upside with 263,000 jobs created in March, 78,000 more than analysts’ consensus estimate. Goods producing firms contributed 82,000 jobs, led by 49,000 new construction positions.
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. 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 economy.