Non-manufacturing in August reflects late summer slide, reports ISM

As was the case for its sibling report focused on manufacturing, the Institute for Supply Management's (ISM) Non-Manufacturing Report on Business, which was issued earlier today showed a sequential decline in non-manufacturing activity for the month of August.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 51.4 (a level of 50 or higher indicates growth) in August, which was down 4.1 percent from July. Despite the sequential decline, the NMI remains on the right side of growth, with the NMI remaining at 50 or higher for the last 79 months. The August NMI is 3.7 percent the 12-month average of 55.1.

Each of the report's four key metrics, including the NMI was down in August. Business activity/production was off 7.5 percent at 51.8 while still growing for the 85th month in a row, and new orders decreased 8.9 percent to 51.4 and while also growing for the 85th consecutive month. Employment saw a slight drop-off by 0.7 percent to50.7 and grew for the third straight month.

ISM reported that 11 non-manufacturing industries reported growth in August, including: Utilities; Real Estate, Rental & Leasing; Accommodation & Food Services; Finance & Insurance; Educational Services; Health Care & Social Assistance; Public Administration; Management of Companies & Support Services; Professional, Scientific & Technical Services; Information; and Construction. The seven industries reporting contraction in August were: Other Services; Mining; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Wholesale Trade; Retail Trade; and Arts, Entertainment & Recreation.

Comments by ISM member respondents mentioned in the report were muted to a degree in August. An accommodation and food services respondent pointed to a relatively stable August, with no sharp increase or decrease in sales or pricing, coupled with labor availability and cost remaining a very high focal point. A retail trade respondent cited how “the business environment has softened a bit over the last month. There are now opportunities to fill in the marketplace.” And a wholesale trade respondent observed that things are good, but slowing from previous months.

“When you see July's figures, which came in show strong, we wanted to see if that was a sustainable level as it was pretty high,” said Tony Nieves, chair of the ISM's Non-Manufacturing Business Survey Committee. “But I also felt that the NMI would not come down as much as it did. Anything over 50 is good, especially considering where things were in July.”

Nieves explained that a trend of two-to-three months is needed, as opposed to a single month of data, adding that September is always viewed as a pivotal month when looking at the economy.

And even though there are seasonal adjustments built into the report, September marks the month that could best be termed as back to business, he explained, especially when looking at hiring, which tends to increase in the fall. But should September and October come in with similar numbers, there would then be come cause for concern as it relates to rate of growth, he noted.

“The employment index for our report is very similar to the U.S. jobs report issued last week at 151,000 jobs,” he said. “And GDP at 1.1 percent is close to what our NMI says in terms of growth. Everything seems to be on the same page––good, bad, or indifferent––but this is on the less optimistic side even though it is only for one month.”

Other notable metrics in the report included:
-supplier deliveries up 0.5 percent at 51.5 (above 50 for this metric means it contracted);
-prices down 0.1 percent to 51.8;
-backlog of orders down 1.5 percent to 49.5; and
-inventories down 6.0 percent to 48.0

Nieves said these numbers, along with the aforementioned core four metrics, represent a capacity utilization equation, with backlog contracted and the inventory decline being an inventory burn off, as inventories were at 54.0 in July.

“This means it was burned off and there were more resources, whether it be human capital or tangible goods, and were more resources than were needed for the level of business because of the huge decline,” he said. “What we are seeing over all is that it is all in sync as far as I am concerned. A good indication next month would be how much of an inventory buildup there is relative to what we are seeing in the new orders index and what might be in the pipeline for our member companies.”

Signs of non-manufacturing growth in the coming months for non-manufacturing cited by Nieves include backlog of orders, slowing of deliveries, and inventory being depleted and replenished. These things serve as the equation for a robust economic situation and need to be monitored month-to-month, explained Nieves.

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