Non-manufacturing activity drops off in March, with growth remaining positive

Coming off of a very strong performance in February, non-manufacturing activity declined in March while still remaining in decent shape, based on data issued today in 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—was 55.2 (a reading of 50 or higher indicates growth) in March, down 2.4 percent from February's 57.6, highest NMI going back to October 2015. The NMI has grown now for 87 consecutive months, and the February reading is 0.2 percent below the 12-month average of 55.4.

Each of the report's core four metrics, including the NMI, was down in March. Business activity/production dropped 4.7 percent to 60.3, while growing for the last 92 months and it was up against February's 63.6, which was the highest level since February 2011's 63.8. New orders dropped 2.3 percent to 58.9, while still growing for the last 92 months. And employment saw a 3.6 percent decrease to 51.6, still growing for the last 37 months.

ISM said that 15 non-manufacturing industries reporting growth in March, including: Management of Companies & Support Services; Utilities; Wholesale Trade; Mining; Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Accommodation & Food Services; Retail Trade; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Construction; Finance & Insurance; Other Services; and Public Administration. The three industries reporting contraction in March were Information; Educational Services; and Professional, Scientific & Technical Services.

Even though the numbers in March were down, ISM member respondent comments in the report were on the positive side. A construction respondent said that growth on a number of projects has slowed a little while revenue projections are steady. A public administration respondent said that business is picking up, service labor is tight, and new legislation has had a significant impact.

“When you look at the NMI heading down 2.4 percent, it is still bolstered by both activity in new orders being close to 60, as employment softened, and supplier deliveries at 51.5 (above 50 for this metric means it is slowing),” said Tony Nieves, chair of the ISM's Non-Manufacturing Business Survey Committee. “We have had such a strong level of growth throughout the first quarter that the 58.9 in new orders may cause a pause now, but going back two years ago that would have been a great number.”

What's more, heading into March he said it was unknown if March's 63.6 for business activity/production and 61.2 for new orders would be sustainable, with March data being viewed as a softening or a correction of sorts.

“That is too early to tell, we need to see how the numbers trend out going forward,” he explained. “There is still good business activity, with a little bit of softening on the employment side for the sector. Post-election, there was a lot of confidence and optimism, but now there is some uncertainty as it relates to policy, whether it is trade or immigration or healthcare. There is a lot of noise out there in regards to those things, but over all there remains a level of optimism and confidence coming from our respondents.”

Other notable metrics cited in the report include:
-inventories fell 3.5 percent to 48.5;
-backlog of orders dropped 1 percent to 53; and
-prices fell 4.2 percent to 57.7

Nieves stressed that March is an example of growth still occurring, albeit it is slowing to a degree. And while March may represent a slight pullback, the numbers still provide a decent outlook.

Looking at the first quarter on a cumulative basis, Nieves said the cumulative numbers exceeded expectations from the beginning of the year.

“It is better,” he said. “We have always had this little bit of a lag in the first quarter every year. It is a post-holiday thing, with January getting a little soft, with the first quarter usually being a little slow. This time, it carried through from post-election all the way into February with pretty strong numbers. There is a little bit of pullback in March, but not much.”

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