ISM Reports Some Growth in Non-Manufacturing Sector

Non-manufacturing activity was essentially flat from January to February and remained on the right side of growth, according to the monthly Non-Manufacturing Report on Business issued by the Institute for Supply Management (ISM) today.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 53.4 in February (a level of 50 or higher indicates growth), which was 0.1 percent off from January, with economic activity in the non-manufacturing sector growing for the 73rd consecutive month. The February PMI is 3.2 percent below the 12-month average of 56.6.

Fourteen non-manufacturing sectors reported growth in February, including Accommodation & Food Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; Utilities; Construction; Finance & Insurance; Transportation & Warehousing; Professional, Scientific & Technical Services; Public Administration; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Educational Services; Information; and Wholesale Trade.

Two of the report's key metrics, including the NMI, were down in February. New orders fell 1.0 percent to 55.5, which was not as steep of a decline as the 2.4 percent drop from December to January. But even with the sequential declines, new order activity is strong over all, showing growth for 79 months, with 12 non-manufacturing sectors showing growth and four showing declines.

Business Activity/Production was up 3.9 percent to 57.8, showing growth for the 79th month in a row, with ISM member respondents pointing to things like higher demand for growth, and better than forecasted business activity as drivers for the impressive output. Employment, meanwhile, tailed off 2.4 percent to 49.7 in contracting for the first time since February 2014.

As in recent months, comments from ISM member respondents included in the report were mostly positive.

An information services respondent said that business and revenue are holding steady with an optimistic outlook for the rest of 2016, and a healthcare and social assistance respondent said over all business is increasing. Conversely, a mining respondent said that the industry is being hit with commodity pricing at over 12 year lows.

“The NMI is down ever so slightly month over month and is its lowest number since February 2014, and business activity is very strong,” said Tony Nieves, chair of the ISM's Non-Manufacturing Business Survey Committee, in an interview. “As for how that happened even though the NMI is down, it is because new orders the month before in January were very high and correlates directly with that. It is a shorter lead time than manufacturing, with the effects of that seen very quickly, say in a few months, compared to a large cycle time on the manufacturing side.”

As for the employment decline, Nieves said it is just below baseline, with the last time it was at this level was February 2014, the last time the NMI contracted. And he said it is a reaction to the confidence level and also more of a variable expense (as it can be ramped up or down) in non-manufacturing than manufacturing because of the labor intensiveness in the non-manufacturing sector.

Supplier deliveries in February fell 1.0 percent to 50.5, slowing for the second straight month (a number under 50 for this indicates growth), and inventories were up 1.0 percent at 52.5, growing for the 11th month. Prices fell 0.9 percent to 45.5.

Should the NMI remain in its current range, Nieves said that should be viewed as a strong start to the year for the first quarter.

“Even with some slight downward fluctuation, it is not a doom and gloom scenario,” he explained. Growth has been pretty consistent and sustainable over all. We are north of 50 in the NMI, and new orders look strong. And when confidence builds up, we will see the employment number come back.”

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