The Institute for Supply Management’s non-manufacturing composite index fell 0.7 point month on month, (m/m) to a still very strong 58.8 in March. The indexes is off strong start in 2018, up one point 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.

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-down 5.3 points to 59.5 in March and was up 4.6% 3MMA y/y and 2.8% 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 56.6, up 1.6 points m/m. Short supply of temporary help and construction was noted by the nonmanufacturing sector explained last month’s deep plunge, however this month is trending back upward. The employment sub-index was up 7.2% 3MMA, and by 5.3% on a 12MMA basis.

The business activity sub-index dropped by 2.2 points m/m to 60.6, however when viewed on a 12MMA y/y basis, it was up 1.9%. Fifteen industries reported growth in business activity, up from 13 in January. The exports new order sub-index was down 1.5 point m/m to 58.0. On the other hand, the import sub-index increased by 5.0 points to 55.0.

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 unclear 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

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.