The Institute for Supply Management’s non-manufacturing composite index fell-back 2.7 points in November to 57.4, falling short of analysts’ expectations. Last month the index rose to its highest level since October 2003. Despite the decline in November, the index represents continued growth in the nonmanufacturing segment as the fundamentals continue to be supportive for nonmanufacturing, which accounts for 88% of GDP.
On a 3 month moving average basis (3MMA), the index scored 58.1, up 4.8% three months year on year, (y/y) and by 3.9% on a year on year. (y/y) comparison. Momentum (defined as 3 month minus 12 month), was positive 0.9%.
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. November’s 57.4 brought the index back in-line with the recent upward trend, (blue arrow).
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 4.1 points to 58.7 in November but was up 5.6% 3MMA y/y. Fourteen industries reporting growth in new orders, while two reported declines.
The employment sub-index came in 55.3, down 2.2 points m/m, but up 0.7% 3MMA y/y. Eleven industries reported an increase in employment, compared with 13 in October. The five industries noting a decline were agriculture, forestry, fishing and hunting; professional, scientific and technical services; mining; accommodation and food services; and information.
The business activity sub-index fell 0.8 point m/m to 61.4, however when viewed on a 3MMA y/y basis, it managed a gain of 2.9%.
The exports new order sub-index was off 3.0 points m/m to 57.0 as the import sub-index gained 0.5 point m/m to 52.5.
The inventory sub-index climbed 2.0 points to 54.5 as eleven industry groups reported an increase in inventory while three reported a decline. The prices paid sub-index fell 2.0 points to 60.7. Among the commodities noted as up in price were; diesel fuel and gasoline. Steel products were noted among the products that were down in price. Commodities reported in short supply include: integrated circuits, labor, labor-construction and labor-temporary workers.
The ISM nonmanufacturing survey indicates that the economy is performing well despite the roll-back in the index in November. Headwinds going forward are policy based. Specific business concerns continue to be around 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.