The Institute for Supply Management’s non-manufacturing composite index for April was up 2.3 points month on month to 57.6, besting analyst’s expectations. On a 3 month moving average basis the index scored 56.8, up 4.1%. Momentum (defined as 3 month minus 12 month), was positive 4.9%. Overall, the details were encouraging as new orders, business activity and exports all increased, while imports fell.
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).
At Gerdau, we feel that it is important to keep an eye on the non-manufacturing index since it accounts for approximately 88% of GDP. A rising ISM non-manufacturing index correlates well with increased demand for steel products.
In this report we prefer to report the numbers as three month moving averages (3MMA), since it helps smooth out the volatility in single month on month data. New orders increased from 58.9 to 63.2, the highest since the August 2015. The employment index came in 51.4, off 0.2 m/m. Business activity increased by 1.5 points m/m to 62.4, this was the fifth time over the past six month that it has moved-up. Exports rose to 65.5, up 3 point m/m as imports fell 2.5 points to 53.0. The inventory index crossed the neutral threshold, rising to 52.5 from 48.5. (Table 1)
As was discussed in Monday’s ISM manufacturing index report, there seems to be a disconnect between the soft and hard data. The bullish ISM index numbers do not support the week 0.7% growth in the Q1 GDP assessment. Economists think that the index values have been somewhat inflated since the presidential election as a result of optimism on the part of those surveyed. Early indications point to a much stronger Q2 GDP result as real consumer spending is tracking at a 3.4% annual rate. At this point it appears that the fundamentals continue to be supportive for the continued expansion of 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 nonmanufacturing economy. We have seen that a strengthening nonmanufacturing economy translates to improved steel consumption.