Non-manufacturing output declines in October but remains in growth mode, says ISM report

Non-manufacturing activity in October, while still at a high level, declined compared to an all-time high in September, according to the Non-Manufacturing Report on Business, which was issued by the Institute for Supply Management (ISM) earlier today.

The index ISM uses to measure non-manufacturing growth—known as the NMI–dropped 1.3% to 60.3 (a reading above 50 indicates growth), while still growing for the 105th consecutive month. The October NMI is 1.8% above the 12-month average of 58.5.

ISM said that 17 non-manufacturing sectors reported growth in October, including: Real Estate, Rental & Leasing; Information; Transportation & Warehousing; Utilities; Arts, Entertainment & Recreation; Professional, Scientific & Technical Services; Construction; Health Care & Social Assistance; Management of Companies & Support Services; Wholesale Trade; Public Administration; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Mining; Finance & Insurance; Retail Trade; and Other Services. The only industry reporting a decrease in October is Educational Services.

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

-business activity/production down 2.7% to 62.5, growing for the 111th month in a row;
-new orders were off 0.1% to 61.5, but still growing for the 93rd consecutive month;
-employment decreased 2.7% to 59.7, growing for the 56th consecutive month;
-supplier deliveries slowed down at a faster rate% at 57.5 (a reading above 50 indicates contraction) and slowing for the 34th straight month;
-prices fell 2.5% to 61.7 growing for the 32nd straight month;
-inventories were up 1.5% at 56.0, heading up for the ninth month in a row; and
-backlog of orders fell 5% increase to 53.5, up for the tenth straight month

Tariff concerns were again front and center based on comments included in the report by ISM non-manufacturing member respondents.

“Tariffs are beginning to impact business. We ask our suppliers to hold pricing for six months, but we are experiencing difficulties,” a construction respondent noted. And a mining respondent stated that it has been very difficult to make decisions due to instability brought by the latest trading dispute, adding that in this environment, clients tend to postpone capital-expenditure decisions.

Looking at the October data, Tony Nieves chair of ISM's Non-Manufacturing Business Survey Committee, said it was surprising that October's NMI reading was as strong as it was, coming off of a record month.

“The bar was set so high [in September] so coming in just under it really speaks to the strength of the sector right now,” he said in an interview. “That is supported by 17 of the 18 non-manufacturing sectors coming in with growth in October.”

And while some of the report's key metrics posted sequential declines, Nieves said it cannot be overlooked that they were up against a record-setting September.

That was especially apparent with employment, he said, as there remains a shortage of skilled workers for sectors like construction that lack the labor pool to draw from.

When asked what some of the key themes of the current state of non-manufacturing are, Nieves explained the sector is weathering the trade war better than its manufacturing counterparts are.

“Even though there is some uncertainty, that is more upstream for non-manufacturers, as it is directly impacting manufacturers and it is a matter of what actually gets transposed into delivered costs into non-manufacturing companies,” he said. “Right now, there are some price increases, but it is not a total pass through at this point. Part of that is due to just straight globalization and the shifting of supply chains, transparency into costs and competitiveness. Those are all factors that mitigate that direct pass-through. It is isolated to certain commodities at this point in time, and we are seeing that in the non-manufacturing sector directly is some metals, like steel and aluminum, as well as lumber and computers and peripherals, too.”

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