ISM reports solid non-manufacturing output for February

Non-manufacturing output had a strong month in February, according to the Non-Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The index ISM uses to measure non-manufacturing growth—known as the NMI–rose 3.0% to 59.7 (a reading of 50 or higher indicates growth is occurring), following a 1.3% decline to 56.7 from December to January. This reading represents the 109th consecutive month of NMI growth, with February's NMI up 1.0% compared to the 12-month average of 58.7.

ISM reported that each of the 18 non-manufacturing sectors it tracks reported growth in February, including: Trade; Mining; Educational Services; Utilities; Other Services; Real Estate, Rental & Leasing; Construction; Health Care & Social Assistance; Professional, Scientific & Technical Services; Public Administration; Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Information; Accommodation & Food Services; Arts, Entertainment & Recreation; and Retail Trade.

The majority of the report's key metrics, including the NMI, were up in February, including:
-business activity/production up 5.0% to 64.7, growing for the 115th month in a row;
-new orders were up 7.5% to 65.2, growing for the 115th consecutive month;
-employment was down 2.6% to 55.2, still growing for the 60th consecutive month;
-supplier deliveries slowed to 53.5 (a reading above 50 indicates contraction), falling for the 38th consecutive month;
-prices dropped 5.0% to 54.3 and still showed growth for the 21st consecutive month; and
-inventories headed up 2.0% to 51.0, growing for the third time in the last four months, after contracting in January

Some comments, in the report, from ISM member respondents focused on U.S.-China trade talks, with the comments collected by ISM prior to the recent announcement that the U.S. postponed a previously announced increase for tariffs on Chinese exports to the U.S., which was scheduled to go into effect on March 1, with the current tariff rate remaining at 10%.

An accommodation & food services respondent said at the time that his company was
anxiously awaiting decisions on the fate of the proposed tariffs on China, citing that high Chinese commitments to agriculture output will put cost pressure on food and restaurant margins.”

A construction respondent said that business is still strong in all areas, due mostly to commercial construction activity, and a wholesale trade respondent said that his company is seeing increases in business activity and is projecting strong sales for the month, with stable prices and good fill rates from suppliers, while also noting some spot outages, due mostly to capacity and planning limitations or shortfalls.

Tony Nieves, Chair of the ISM's Non-Manufacturing Business Survey Committee, said in an interview that leading into the holiday season there was a buildup in December which tapered off in January, coupled with February being a rebound month, as we the case based on its solid numbers.

“We see that consumer confidence has had a bit of an uptick, and the unemployment rate is low, with wage pressure and wages rising,” he said. “There is more confidence out there, and the markets have rebounded a little bit. Oil prices are low. There are all these different variables making up a good over all economic picture, and this is all before the positive comments recently coming out of trade negotiations.”

Regarding the current trade outlook, in light of last week's developments, Nieves said that the areas impacted most by trade in non-manufacturing are retail related.

“Within retail, there are a lot of imports,” he said. “That filters into areas like warehousing and transportation and wholesale trade so there are other industries that serve as support services for manufacturing companies. When manufacturing gets hit, it filters down into the other portion of the supply chain where service companies become providers of the companies for which they are typically customers of in that case. It is interrelated. That is the case with the farming industry for agriculture.

The 7.5% increase in new orders, according to Nieves, was expected, adding that it is a byproduct of the still solid economic outlook. And he added it also speaks to how all 18 non-manufacturing sectors were up in February, with only retail trade showing contraction on business activity, while still coming in high on the new orders side. Nieves said that shows how it is hard to sustain those growth levels, with the caveat that these current growth levels are not likely to trend down anytime soon.

That was the case in January, when the NMI saw a slight decrease, in tandem with the overall economy at that point in time.

Nieves said it is likely that first quarter NMI growth is expected to finish strong, adding that the February NMI translates into 3.9% GDP growth on an annual basis.

“It is hard to say if that level is sustainable, but we are going to have a nice finish and we will see how much further things go in trade negotiations, in terms of a positive accord being reached, which, I believe, will happen, as it is in China's best interests based on what has happened to its GDP and economy as a result of the trade war,” he said. “It is a 4:1 ratio in which they are feeling the pain more than we are.”

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