The Institute for Supply Management’s non-manufacturing composite index advanced 0.3 points in October to 60.1 to its highest level since October 2003. The result once again exceeded analysts’ expectations. The results were generally positive, as the sub-indexes of; business activity, employment, exports and inventories all improved. New orders dipped a fraction, imports were flat and backlog fell. Overall, fundamentals remain supportive for nonmanufacturing, which accounts for 88% of GDP.
On a 3 month moving average basis (3MMA), the index scored 58.4, up 7.3% three months year on year, (y/y) and was stronger by 4.0% on a year on year. (y/y) comparison. Momentum (defined as 3 month minus 12 month), was positive 3.3%.
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 index from 2003 to present. The index has been in the expansionary zone since the great recession ended. However, it had been range bound over the previous 12 months, (54.8 to 57.6) before September’s breakout to 59.8, followed by October’s 60.1 reading.
Table 1 breaks down the details in month on month, 3MMA year on year, 12MMA y/y and momentum comparisons. The new order sub-index fell 0.2 points to 62.8 in October. Construction was one of the 16 industries reporting growth in new orders. Utilities and transportation also reported growth in new orders for the month.
The employment sub-index came in 57.5, up 0.7 point m/m. Data released today from the Bureau of Labor Statistics report that non-farm payrolls increased 261,000 in October and that the U3 unemployment rate fell to a post-recession low of 4.1%. Sixteen industries reported increased business activity, and one industry reported decreased activity. The business activity sub-index was up by 0.9 points m/m to 62.2.
The exports new order sub-index surged 4.0 points m/m to 60.0 as the import sub-index was up flat m/m at 52.0.
The inventory sub-index moved higher by 1.0 point to 53.5 as seven industry groups reported an increase in inventory while six reported a decline. The prices paid sub-index fell 3.6 points to 62.7. Among the commodities noted as up in price were aluminum, beef, carbon products and cheese. Commodities reported in short supply include: diesel fuel, electronic parts, labor, labor-construction, labor-temporary workers, medical supplies and PVC products.
The ISM nonmanufacturing survey indicates that the economy is performing well despite the disruption caused by the hurricanes. Headwinds going forward are policy based. Specific business concerns surround healthcare and taxation as well as labor constraints.
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.