The Institute for Supply Management’s non-manufacturing composite index fell 0.4 point month on month, (m/m) to a still very strong 59.5 in February. The indexes is off strong start in 2018, up two points from its 2017 fourth quarter average. The strong advance in the index points to continued growth in the nonmanufacturing segment as the fundamentals remain strong for the sector. This month’s employment sub-indexes scores sharp decline was cause for concern, as labor is in short supply.

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.

ismnonmfg-fig1Figure 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 1ismnonmfg-table1 breaks down the details in month on month, 3MMA, (three month moving average) year on year, 12MMA y/y and momentum comparisons. The new order sub-index moved-up 2.1 points to 64.8 in February and was up 0.8% 3MMA y/y and 3.1% 12MMA y/y. Fourteen industries reported growth in new orders and four noted a decline.  Increased spending is being approved for capital projects based on tax benefits and the improving economy.

The employment sub-index came in 55.0, down 6.6 points m/m. Short supply of temporary help and construction was noted by the nonmanufacturing sector. The employment sub-index was up 6.3% 3MMA, and by 4.7% on a 12MMA basis.

The business activity sub-index climbed 3.0 points m/m to 62.8, however when viewed on a 3MMA y/y basis, it fell 3.4%. Fifteen industries reported growth in business activity, up from 13 in January.

The exports new order sub-index was up 1.5 point m/m to 59.5. On the other hand, the import sub-index fell by 4.0 points to 50.0. The gap between exports and imports indicates that trade will be accretive to GDP first quarter as opposed to the drag it has been in recent quarters.

The inventory sub-index gained 4.5 points to 53.5. Twenty-four percent of respondents maintain that their inventory levels are too high, while seventy-four percent of respondents said their inventory level was just right.

The ISM nonmanufacturing survey indicates that the economy is performing very well. This is important since 88% of GDP stems from the non-goods producing segment of the economy.

The Trump administration announced that the U.S. will impose a 25% tariff on imported steel and a 10% tariff on imported aluminum.  Details are sketchy at this point and it remains to be seen whether there will be country and or product exceptions. Steel and aluminum producers are the clear winners. The tariffs will support domestic production and boost investment, resulting in higher productivity and lower costs. Focusing on steel, construction, autos, energy and machinery equipment account for most of the steel demand. U.S. approximate consumption rates by sector are as follows: Construction 40%, autos are 25% energy 10% and machinery equipment 10%. Consumers of steel products will likely see their input costs rise as a result of the tariffs.

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.