The Institute for Supply Management’s non-manufacturing composite index moved-up 1.2 points in August to 55.3, a nice turn-a-round after July’s disappointing 3.5 point drop. The results were generally positive, as new orders and employment both improved. The trade details were mixed. New exports orders rose while imports fell. The non-manufacturing index is important to keep an eye-on since it accounts for 88% of GDP.
On a 3 month moving average basis (3MMA), the index scored 55.5, up 2.0% three months year on year, (y/y) and stronger by 2.5% on a year on year comparison. Momentum (defined as 3 month minus 12 month), was slightly negative, -0.3%.
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 history of the ISM nonmanufacturing from 2003 to present. The index has been in the expansionary zone since the great recession ended. It has been trading in a fairly narrow range over the past 12 months, ranging from 54.8 to 57.5, averaging 56.3.
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 0.2 points to 57.6 in August. Fourteen industries reported stronger new orders in August. Just two industries, construction and healthcare reported a decline in new orders. The employment sub-index came in 55.2, down 0.5 points m/m. Eleven industries reported increased employment, while three reported declines. The business activity sub-index fell by 1.1 points m/m to 58.1. The exports new order sub-index ticked-up 0.2 points m/m to 54.3 as the import sub-index was up 0.8 point m/m to 51.0.
The inventory sub-index fell a fraction, (0.2) to 55.8 as four industry groups reported a decline in inventories. Construction was among the six industries that reported an inventory decline.
The prices paid sub-index advanced 2.2 points to 57.9. One of the commodities reported in short supply was construction labor. This observation is consistent with other sources and has been recurrent. The backlog sub-index posted a score of 52.7, off 1.2 points m/m, but 1.5 points higher on a m/m basis.
The ISM non-manufacturing report was mostly upbeat for the month. Analysts expect to see improved numbers over the next several months since consumer spending is holding up well. It remains to seen what the impact of hurricane Harvey and Irma will have on the U.S. economy. One concern is higher gasoline prices. A 15% increase through the end of the year would shave 0.2 percentage points off GDP.
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.