The Institute for Supply Management’s non-manufacturing composite index fell-back 2.7 points in December to 55.9, its second decline in as many months. Despite the decline in November and December, the index represents continued growth in the nonmanufacturing segment as the fundamentals remain strong for the nonmanufacturing sector, which accounts for 88% of GDP.

For the year, the ISM nonmanufacturing index averaged 56.96, up from 54.9 in 2016. The index is down slightly from the 57.1 average in 2015, making 2017 the second highest annual average since 2005. On a 3 month moving average basis (3MMA), the index scored 57.8, off 4.0%, three months year on year, (y/y) and down by 0.2% on a year on year (y/y) comparison. Momentum (defined as 3 month minus 12 month), was negative 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 shot above the recent trend-line, while December’s score falls a bit below. Overall however, the trend is still sloping upwards.

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 4.4 points to 54.3 in December but was up 3.1% 3MMA y/y. Nine industries reporting growth in new orders, while two reported declines. Steel and construction were not listed among either of these groups.

The employment sub-index came in 55.3, up 1.0 points m/m, and up 3.1% 3MMA y/y. Twelve industries reported an increase in employment, compared with 11 in November. The three industries noting a decline included mining, scientific and technical services.

The business activity sub-index fell 4.1 points m/m to 57.3, however when viewed on a 3MMA y/y basis, it managed a gain of 0.3%. The exports new order sub-index was off 0.5 point m/m to 56.5 as the import sub-index was flat at 52.5.

The inventory sub-index fell 1.0 points to 53.5 as seven industry groups reported an increase in inventory while four reported a decline. The inventory sentiment index rose 6.5 points indicating that many, (29%) respondents believe that their inventories are too high. Just four percent felt that their inventories are too low.

The prices paid sub-index edged higher by 0.1 point to 60.8. Among the commodities noted as up in price were; copper, diesel fuel, construction labor, lumber and gasoline. Commodities reported in short supply include: labor, construction labor, temporary workers, lumber products and transportation services.

The ISM nonmanufacturing survey indicates that the economy is performing well despite the roll-back in the index in November and December. Headwinds going forward are policy based as well as labor constraints. With fewer workers available and baby boomers retiring at a rate of 10,000 per month employers will increasingly seek ways to increase the efficiency of their operations by investing in labor saving technologies.

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.