The Institute for Supply Management’s non-manufacturing composite index got off to a strong start in 2018, climbing 3.9 points in January to 59.9, besting analyst’s expectations. The strong advance in the index points to continued growth in the nonmanufacturing segment as the fundamentals remain strong for the sector.
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. There has been a strong upward trend since the beginning of 2016.
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 surged 8.2 points to 62.7 in January, but was down 0.2% 3MMA y/y. Fourteen industries reported growth in new orders and four noted a decline. The new tax plan is being credited with the increase.
The employment sub-index came in 61.6, up 5.3 points m/m, and up 4.6% 3MMA y/y. Short supply of temporary help and construction was noted by the nonmanufacturing sector.
The business activity sub-index climbed 3.8 points m/m to 59.8, however when viewed on a 3MMA y/y basis, it fell 3.1%. Eleven industries reported growth in business activity, led by mining which is benefiting from rising energy prices. Seven industries noted a decline in business activity.
The exports new order sub-index was up 1.5 point m/m to 58.0. The import sub-index was also higher by 1.5 points to 54.0.
The inventory sub-index fell 4.5 points to 49. Despite the decline, a sizable portion of respondents believe that their inventory levels are still too high. Sixty-six percent of respondents said their inventory level was just right, while 29% believe that their inventories are too high. Just seven percent felt that their inventories are too low.
The prices paid sub-index edged higher, rising 2.1 point to 59.8. Among the commodities noted as up in price were; aluminum products, chemical products and copper. Steel was not mentioned. No commodities were reported to have posted price reductions.
The ISM nonmanufacturing survey indicates that the economy is performing very well. One concern going forward is rising energy prices as it subtracts from consumer spending elsewhere in the economy. While higher oil prices are a drag on spending, they should boost investment.
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.