ISM reports non-manufacturing slips in July but still growing

The Institute for Supply Management (ISM) reported today that non-manufacturing activity remained on the right side of growth in July, despite seeing a sequential decline from June.

The index ISM uses to measure non-manufacturing growth—known as the NMI—fell 1.4% to 53.7 (a reading of 50 or higher indicates growth is occurring) in July. This reading represents the 114th consecutive month of NMI growth, with July's NMI down 3.9% compared to the 12-month average of 57.6. July's reading is the lowest over that span.

ISM reported that 13 non-manufacturing sectors grew in July, including: Accommodation & Food Services; Utilities; Professional, Scientific & Technical Services; Real Estate, Rental & Leasing; Transportation & Warehousing; Construction; Information; Other Services; Finance & Insurance; Public Administration; Management of Companies & Support Services; Mining; and Health Care & Social Assistance. The five industries reporting a decrease are: Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Retail Trade; Wholesale Trade; and Educational Services.

The majority of the report's key non-manufacturing metrics, including the NMI, were down in June, including:

business activity/production down 5.1% to 53.1, still growing for the 120th month in a row;
new orders were off 1.7% to 54.1, still growing for the 120th consecutive month;
employment rose 1.2% to 56.2, growing for the 65th consecutive month;
supplier deliveries slowed to 51.5 (a reading above 50 indicates contraction);
prices fell 2.4% to 56.5 and showed growth for the 26th consecutive month; and
inventories slipped 5% to 50 growing for the third straight month
Themes in the report submitted by ISM member respondents focused on various topics, including business conditions, tariffs, and the economy.

A construction respondent noted that tariffs continue to push costs higher, and customers are looking for more discounts due to mortgage-rate fluctuations. And a wholesale trade respondent said that business is somewhat slow for the first half of 2019, but it is expected to pick up for the second half.

ISM Non-Manufacturing Business Survey Committee Chair Tony Nieves said that this most recent batch of data is consistent with what is going on globally.

“There has been a bit of a cooling off, but there are still good things like steady jobs growth and consumer confidence is at an eight-month high,” he said. “Put that together with low unemployment and wage increases, and the only headwind now is the escalation in the trade war. That will show up in the August data.”

Looking ahead, though, Nieves said September is viewed as a pivotal month for non-manufacturing, in terms of gauging how things will finish up in the fourth quarter, explaining that even though there are seasonal adjustments, non-manufacturing activity tends to be slower this time of year, as it is for manufacturing, due to plant closures, vacations.

While business activity/production saw a 5.1% decline in July, Nieves said it is not a major cause for concern.

“If you look at it in totality, we are in a better place than we were even at the beginning of the year, when we had such high rates of growth,” he observed. “It is hard to stay at a high level from month to month, as the bar keeps adjusting up. If you were are a certain level of growth activity in February and March and then it drops for six or seven months, you are measuring change from one month to the next. You are really not any worse off. It is when you start contracting that is when there is a problem.”

Employment growth is a key non-manufacturing metric to monitor in the months ahead, given the labor-intensive nature of the sector, according to Nieves, with wages increasing and a still-decent unemployment rate. And little-to-no inflation is also a benefit at the moment, too.

“You want business activity and new orders to grow,” he said. “But as long as it stays in positive territory and above 50, that is OK,” he said. “The next round of tariffs will have a direct impact on consumer goods, but if consumer confidence is still strong, with wages up, and price rise for certain items, people will still buy them if they want them. If they have the money and are confident it will keep coming in, people will keep making purchases. It is supply and demand.”

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