The Institute for Supply Management’s non-manufacturing composite index fell back more than analysts expected in July, dropping 3.5 percentage points to 53.9. Most economists expect non-manufacturing to pick-up over the next several months since consumer spending remains robust and construction activity is holding-up well.
On a 3 month moving average basis (3MMA), the index scored 56.1, up 2.0% three months year on year, (y/y) and stronger by 0.7% over the past year. Momentum (defined as 3 month minus 12 month), was positive 1.3%.
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 fell 5.4 points to 55.1 in July. Thirteen industries reported stronger new orders in July. Just one industry (management of companies/support services), reported a decline in business activity. The employment sub-index came in 53.6, down 2.2 points m/m. Nine industries reported increased employment, while four reported declines (educational services, agriculture/forestry, utilities and finance/insurance). The business activity sub-index decreased by 4.9 points m/m to 55.9, the first time since March that it fell below 60.
The exports new order sub-index fell 2.0 points m/m to 55.0 as the import sub-index was up 0.5 point m/m to 51.5. The inventory sub-index fell one point to 56.5 as four industry groups reported a decline in inventories. The early year inventory build is expected to drive sales in the latter half of the year. Still the inventory sentiment jumped 5.5 points to 67.5 meaning that most respondents felt that inventories were still too high. The prices paid sub-index moved-up3.6 points to 55.7. One of the commodities reported in short supply was construction labor. This observation is consistent with other sources. The backlog sub-index posted a 56.6, down 0.5 points m/m, but was higher on a 3MMA basis by 2.8% and momentum was a strong 5.2%.
This month’s ISM non-manufacturing report was mostly down from recent months, however the headline index remains solidly in the expansionary zone, (>50). The index captures both changes in service activity and changes in sentiment. Sentiment has weakened since the election as little progress has been made on the legislative front. However, core economic activity is robust, job creation is stellar and consumer and business confidence near record levels.
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.