ISM Non-manufacturing index shows growth in May

Non-manufacturing activity in May turned in a decent performance, snapping a two-month streak of sequential declines, according to the May edition of the Institute for Supply Management’s (ISM) Non-Manufacturing Report on Business.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 53.7 in May, which was 0.2 percent better than April and down 2.3 percent from March’s 56.0 and down 3.6 percent from February’s 57.3, which was the highest NMI reading since January 2011. A reading above 50 represents growth. The May ISM Manufacturing Report on Business, which was released last week, was down 1.3 percent at 53.5. With the May NMI remaining above 50, economic activity in the non-manufacturing sector has grown for the last 29 months, according to ISM.

Three of the report’s four core metrics showed growth in May on a sequential basis. Business Activity/Production was up 1.0 percent at 55.6, and New Orders were up 2.0 percent at 55.5. Employment was down 3.4 percent at 50.8.

“The bottom line is that we are seeing month-over-month growth, with the numbers likely being a bit stronger if the employment index was not down 3.4 percent,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “But that employment number is consistent with everything else we are seeing, whether it is the labor market or jobs numbers. Growth in Business Activity and New Orders is showing that we are still in a good trend, but February and March was much stronger. That said, if we were told that these numbers would be in the mid-50s a year and a half ago, we would have taken it.”

Nieves said these numbers remain firmly on the path of sustainable growth, although he noted that it would be ideal if the Employment index would be above 50. But should it decline in the next month or two, it would be acceptable, provided it was not a sustained trend, which could wreak havoc on the non-manufacturing sector.

Supplier Deliveries were up 1.5 percent at 53.0, and Backlog of Orders at 53.0 was flat from April but still growing.

“It looks like with Supplier Deliveries slowing (it grew 2 percent from March to April) goes hand in hand with the uptick in activity in New Orders,” said Nieves. “There appears to be a correlation there.”

Prices dipped 3.8 percent to 49.8, due largely to declines in gas and oil and petroleum-based products. In fact, this marked the first time Prices have declined since July 2009, according to ISM data. But Nieves pointed out that Prices also have as much to do with timing of purchases as the price itself, with commodities being more demand-pulled being the ones that saw prices fall.

When asked to provide an economic outlook as it pertains to the non-manufacturing sector, Nieves said that what is happening now is very “reactionary,” noting that when demand is intact and companies see an increase or an uptick they will staff accordingly, albeit with a slower cycle time.

“It really is a ‘straight’ reaction now and more about the current conditions of their respective businesses,” he said.

This was evident in the report’s comments section, with ISM members being generally positive about the direction of the economy, although many indicated they were treading carefully at the same time.

In assessing the coming months, Nieves said there might be some slowing down in the coming months as vacations and plant closings can result in less hiring and seasonal adjustments before things resume on more of a traditional growth path by late fall.