The Institute for Supply Management’s non-manufacturing composite index for June moved-up 0.5 percentage point to 57.4, beating analyst’s expectations by 0.5 percentage point. On a 3 month moving average basis (3MMA), the index scored 57.3, up 4.1% year on year, (y/y). Momentum (defined as 3 month minus 12 month), was positive 3.8%. Overall a good news report on the health of the US non-manufacturing economy.
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 shows the historic “headline” score of the ISM nonmanufacturing from 2003 to present. The index has been in the expansionary zone since the great recession ended. The index is currently trending higher. 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 increased 2.8 percentage points to 60.5 in June which helped offset May’s 5.5 point decline. All 15 industries surveyed reported stronger new orders.
The employment index came in 55.8, down 2.0 percentage points m/m. Fourteen industries reported increased employment, two reported declines. 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 new order sub-index increased 0.5 percentage point m/m to 55.0 as the import sub-index was up 2.5 percentage points m/m to 51.0. The inventory sub-index increased to 57.5, up 3 percentage point. Construction was the only industry to report a decline in inventories. The prices paid sub-index increased 0.9 percentage point to 52.1 in June. Commodities that were reported in short supply included labor and construction services.
The ISM non-manufacturing report for June was generally positive. There is an overall optimism in the economy. The ISM second quarter surveys indicate a solid 2.9% annualized GDP. Concerns going forward are labor shortages in construction and uncertainty surrounding healthcare. Recent oil price declines are also worrisome since oil prices are directly tied to rig count.
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.