ISM reports non-manufacturing remains on growth path in July

Despite a sequential decline, non-manufacturing activity in July remained in growth mode, according to the Institute for Supply Management's (ISM) Non-Manufacturing Report on Business.

The index ISM uses to measure non-manufacturing growth—known as the NMI–fell 3.4% to 55.7 (a reading above 50 indicates growth) in July. The July NMI is 2.3% below the 12-month average of 58.0. The PMI has now grown for 102 consecutive months.

ISM said that 16 of the 18 non-manufacturing sectors reported growth in July, including: Mining; Public Administration; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Other Services; Construction; Real Estate, Rental & Leasing; Transportation & Warehousing; Finance & Insurance; Retail Trade; Wholesale Trade; Arts, Entertainment & Recreation; Information; Utilities; Health Care & Social Assistance; and Management of Companies & Support Services, with Educational Services; and Professional, Scientific & Technical Services each seeing decreases.

The report's key metrics, including the NMI, were mixed in July, including:

-business activity/production was down 7.4% to 56.5 but still growing for the 108th month in a row;
-new orders were down 6.2% to 57.0, but still growing for the 90th consecutive month;
-employment increased 2.5% to 56.1, growing for the 53rd consecutive month;
-supplier deliveries slowed down at a faster rate% at 53.0 (a reading above 50 indicates contraction) and slowing for the 31st straight month;
-prices headed up 2.7% to 63.4, growing for the 29th straight month;
-inventories were flat at 53.5, heading up for the sixth month in a row; and
-backlog of orders saw a 5% decrease to 51.5, up for the seventh straight month

Comments submitted to the report by ISM member respondents indicated that while market conditions are solid, that optimism is somewhat tempered by tariff- and trade-related concerns.

“Tariffs continue to make steel pricing volatile,” said a mining respondent. “Crude oil has trended over (US)$70 a barrel, which provides a bullish outlook for the duration of 2018.”

And a Management of Companies & Support Services Vendors respondent said that his company continues to report that they are seeing significant increases in order volume this year and hiring more staff to keep up with the increase in orders.

Even with the decline in the PMI, Tony Nieves, chair of ISM's Non-Manufacturing Business Survey Committee, said in an interview that July was solid overall.

“These are good numbers,” he said. “There are certain things in place, or factors, which are impacting the report notably the uncertainty surround the tariffs situation. On a positive note, however, we see the employment index growing, which is a residual of the previous months of strength, where we had some capacity issues to deal with and had to work off some backlog and other things. This sector is labor-intensive so it bodes well that we are seeing employment gains. We see some inflation creep in, and it is attributed to some specific commodity areas.”

Nieves added that this cooling off in July is actually preferred to an overheating situation for the economy, with the expectation that there may be continue to be some sideways movement in the next month that could be followed by a strong fourth quarter contingent on future developments related to tariffs and trade.

On a year-to-date basis, Nieves was optimistic about the state of non-manufacturing over all.

“Our respondents are optimistic,” he said. “They think that this sector has continued to exceed expectations right up until this month. I still feel confident, especially where we are seeing favorable business conditions. If we get some more clarity about what is going on around trade agreements, who knows how fast and hard things will go?”

Non-manufacturing prices in July, said Nieves, are reflecting recent tariff impacts on stainless steel and aluminum, as well as petroleum-based products and transportation and trucking prices, too.

“When the economy is good, people will pay for what they want and they have the money to buy it,” he said.

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