ISM Non-Manufacturing Index up for 14th straight month in January

Like its companion report on the manufacturing side, the Institute for Supply Management’s Non-Manufacturing Report on Business is off to a good start in 2011, showing growth for the 14th straight month.

The ISM’s index for measuring the sector’s overall health—known at the NMI—was 59.4 in January, a 2.3 percent increase from December. Like the ISM’s Manufacturing Report on Business, a reading above 50 represents growth.

And all of the NMI’s core metrics were up in December. The Business Activity/Production Index at 64.6 was up 1.7 percentage points. And New Orders at 64.9 were up 3.5 percentage points, and Employment at 54.5 was up 1.9 percentage points.

“I was pleasantly surprised seeing the numbers come in strong,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “I was expecting a little sideways movement and maybe some incremental growth, especially right after the holiday season. I thought there might be a little bit of a lull like we have seen in the past.”

Nieves added that the strength and traction in the non-manufacturing sector that was exemplified in January, when looking at the NMI, Business Activity/Production, and New Orders numbers bodes well for future reports. And he added that Employment, which he said has always been the telltale sign, was originally anticipated to be slow, but it had a strong month.

But he noted that looking at what the inventory of jobs was three years ago compared to today do not represent the same amount of jobs, even though growth is occurring.

“We are on the right track, and I don’t want to diminish that by any stretch, and we are seeing consumer confidence increase, and, therefore, companies are putting forth spending initiatives and putting investment plans back into the economy,” said Nieves. “All indications are that it is sustainable here. Things look pretty good.”

Some other key NMI indices in January include Backlog of Orders (up 2.0 percent at 50.5 in January), Supplier Deliveries (up 2.0 percent at 53.5), and Inventories (down 3.5 percent at 49.0.

The decline in inventories is not so much a seasonality factor as it is companies keeping inventory close to the vest in terms of things like cash liquidity, stated Nieves, adding that they needed a really strong level of confidence in order to go through a substantial inventory build up.

“With activity where it was and new orders coming in, I think we saw an inventory burn-off, with supplier deliveries slow a little bit because of that,” said Nieves. “Inventories will bounce back up next month; they have to, because they cannot operate like that. They are not as imperative in non-manufacturing…it is impacted because of the strong demand we saw month-over-month.

Transportation and Warehousing were among the 13 industries reporting growth in January, according to the ISM report.

In non-manufacturing sectors which are very reliant on intermediaries in the supply chain, Nieves said things like OEM deliveries going straight to facilities and to companies in the non-manufacturing sector are very reliant on distribution channels, which pertain to transportation and warehousing.

“Transportation and warehousing and wholesale trade are the two intermediary elements on the non-manufacturing side for our respondents,” said Nieves.

Going forward, increased of sustained levels of consumer confidence and business confidence will be key in driving future non-manufacturing growth, according to Nieves.