Non-manufacturing activity down from July to August but still solid, says ISM report

While core metrics were down from a very impressive July, the August edition of the Non-Manufacturing Report on Business from the Institute of Supply Management (ISM) was still very strong.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 59.0 in August (a level of 50 or higher indicates growth), which was down from 60.3 in July (its highest reading since January 2008), with economic activity in the non-manufacturing sector showing growth for the 67th month in a row and the overall economy growing for the 73rd straight month. The August NMI is 1.6 percent ahead of the 12-month average of 59.0.

Including the PMI, each of the report's four core metrics was down in August compared to July. Business Activity/Production was down 1.0 percent to 63.9, while still growing at a faster rate for 73 straight months, coming off of August's 64.9, which was its highest level since December 2004 at 65. New orders were off 0.4 percent to 63.4 while also growing for the 73rd month in a row, and employment fell 3.6 percent to 56.0 while still growing for the 18th straight month, as it came in above 50.

A collection of comments submitted by ISM member respondents in the report was largely positive. A construction respondent said that business is good and not slowing down, and a finance and insurance respondent noted that things are trending towards a positive year-end.

“While the numbers may have come off a little bit, there is still strong growth month-to-month,” said Tony Nieves, chair of the ISM's Non-Manufacturing Business Survey Committee. “It is not a glass half empty thing at all. The big questions that remain are that so far we have not seen the effect from recent global economic turmoil impacting the sector. Time will tell if that will materialize. It is clear that the economy has been impacted, especially the stock market, while economic growth has not yet.”

Nieves noted that unemployment has been down a bit, which is reflective of a slowdown in hiring in the summer months, a time in which hiring in the non-manufacturing sector is not as rampant, despite the strong employment output the month before in July.

Supplier deliveries in August were off 0.5 percent to 52.5, and inventories dropped 2.5 percent to 54.5. Backlog of orders rose 2.5 percent to 56.5

The decline in new orders, which was coming off of a recent high, was expected in a sense, as it would have been somewhat unrealistic to see further material growth, explained Nieves.

“July was so strong, but the big surprise was that the sequential drop in orders was not really that much,” he said. “It was going to have to drop off a little bit as the RPMs were running a little too hot for the engine.”

Addressing the 2.5 percent drop in inventories, Nieves said there was some carryover from July into August, with the rate of growth seeing some slowing, even though the sentiment was that inventories remain too high for current business levels.

What's more, he said it is possible there will not be as much inventory buildup for the holidays for the retail sector, which is impacted by longer lead times, and most other sectors have more of a demand-pull inventory model approach. More typical seasonality for inventories, especially for retail and wholesale sectors, could likely start to take hold with September and October's numbers, said Nieves.

Current non-manufacturing growth levels are ahead of previous forecasts made by ISM earlier this year, and Nieves said things remain on track for a strong year for the sector.

He added that it will be interesting to see how business activity translates into overall revenue for non-manufacturing companies.

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