Non-manufacturing activity is off to a good start in 2012, according to ISM data

Non-manufacturing activity is off to a good start in 2012, based on the results of the Institute for Supply Management’s January NMI, its index for measuring the sector’s overall health.

The January NMI—at 56.8—is up 3.8 percent over December’s and is at its highest level since reaching 56.3 in March 2011. A reading above 50 represents growth. The January ISM Manufacturing Report on Business, which was released earlier this week, was up 1.0 percent at 54.1.

Each of the core metrics for the report showed growth from December to January. Business Activity/Production was up 3.6 percent at 59.5, and New Orders were up 4.8 percent at 59.4. Employment increased 7.6 percent to 57.4.

“This really a strong month and the big thing which drove it was the New Orders indices well as Employment, which rose at a level we have not seen since 2006,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “It is a pleasant surprise, and we hope it is not a head fake and is a strong number that is sustainable.”

What’s more, comments provided to the ISM by its NMI survey respondents indicate that the economy is showing consistent growth. A retail respondent noted that the economy is showing signs of stabilization as well as in the supply chain, which appears to be calming inventory and sales positions.”

January’s strong month is somewhat surprising in the sense that it typically trends a bit downward followed by a pickup later in the quarter, whereas it came out of the 2012 gate very strong.

This was especially true with the 7.6 percent bump in January Employment. But while the number is very promising, Nieves said it is important to note whether or not it will be an anomaly.

“Employment is a lagging index and there is a cycle time that companies have when it comes to hiring, which is reactionary to business,” said Nieves. “The majority of companies surveyed are showing slow incremental additions when it comes to hiring, which is more of a trickle effect at this point.”

Inventories in January dipped 1.5 points to 47.0, which is in line with the trend of companies reducing inventory closer to the end of the year. Nieves explained that this shows a burn off of inventories, due to an increased level of business and new orders that inventories are likely to increase in February as companies replenish their business levels.

Backlog of Orders in January was up 4 percent to 49.5, which is still contracting as it is below 50. Nieves said this speaks to the fact that there is currently not a growth in backlog of orders and instead is contracting slower.

“If we see these levels carry forward in the next month or two, we are going to see a backlog in supplier deliveries in the mid-50s range if we sustain this level of business activity and new orders,” said Nieves. “Inventories will grow because they have to grow. The current inventory levels are not sustainable where they are.”

Prices moved up 1.5 percent to 63.5, which Nieves noted was primarily driven by fuel costs in non-manufacturing petroleum-based products like diesel fuel.

With such a strong start to non-manufacturing in 2012, coupled with other positive economic indicators, Nieves stated it is a good indication so far but it remains to be seen how things trends out in the coming months whether growth is flat or shows upticks.

“If it trends out like this over the next month or two, then we are in for a nice ride with the economy,” he said.