The Institute for Supply Management’s non-manufacturing composite index for May fell a fraction of a point to 56.9, slightly lower than analyst’s expectations. On a 3 month moving average basis the index scored 56.5, up 4.0%. Momentum (defined as 3 month minus 12 month), was positive 3.8%. Overall, the details were encouraging.
The ISM nonmanufacturing survey measures the rate and direction of change in activity in nonmanufacturing 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). The ISM nonmanufacturing has been in continuous expansion since early 2010. A rising ISM non-manufacturing index correlates well with increased demand for steel products as the non-goods providing sector of the economy accounts for about 88% of GDP.
Table 1 breaks down the details in month on month, 3MMA year on year, 12 month y/y and momentum comparisons.
The numbers below are reported as three month moving averages (3MMA), to smooth out the volatility in single month on month data. The new order sub-index decreased slightly from 61.1 to 59.9, still strong growth and healthier than its 24 month average of 58.7. The employment index came in 53.6, up 0.9 of a point m/m. Of the 16 industries that report, 15 posted stronger employment numbers. Business activity decreased by 1.0 points m/m to 60.7, but remains stronger than its 24 month average of 59.7. The exports sub-index fell to 65.5, up 0.8 of a point m/m to 60.8 as the import sub-index also fell 0.8 of a point m/m to 52.7. The inventory sub-index increased to 54.5, its fourth month, 10 industries now feel that their inventory levels are too high.
It is becoming apparent that confidence has weakened somewhat after the post-election euphoria. Businesses are now reevaluating their expectations for fiscal stimulus actions this year. Still, the overall economic outlook continues to look promising. Economists at Moody’s are predicting that GDP will rise 3.1% at an annual rate in the second quarter, much stronger than the 1.2% gain in the quarter.
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.