ISM reports non-manufacturing growth but recent events cloud outlook

Following a month that saw major declines, due to the COVID-19 pandemic, non-manufacturing activity in May saw some signs of getting back to growth, but more progress is needed. That was a major takeaway of the new edition of the Non-Manufacturing Report On Business, which was issued today by the Institute for Supply Management (ISM).

The report’s key indicator—the NMI—rose 3.6% to 45.4 (a reading of 50 or higher indicates growth is occurring), declining for the second straight month. While the NMI is contracting, May’s reading represents a significant improvement over April’s 41.8, which dropped 10.7% compared to March’s 52.5 and was the lowest reading since the 40.1 recorded in March 2009 and contracted for the first time since December 2009, halting a 122-month stretch of growth. What’s more, May’s 45.4 NMI reading is 7.6% below the 12-month average of 53.0.

ISM reported that only two non-manufacturing sectors—Agriculture, Fishing & Hunting, Public Administration and Finance & Insurance—saw growth in May. The 14 industries reporting declines included: : Mining; Arts, Entertainment & Recreation; Other Services; Construction; Educational Services; Professional, Scientific & Technical Services; Utilities; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; Transportation & Warehousing; Health Care & Social Assistance; and Retail Trade.

Most of the report’s equally weighted subindexes that directly factor into the NMI saw gains in May, including:

• business activity/production up 15%, to 41.0, contracting for the third consecutive month, and coming off of April’s 22.0% decline to 26.0, which marked the lowest reading going back to the report’s inception in 1997 and down for the second straight month after growing for 127 months;
• new orders rose 9.0%, to 41.9, contracting for the second straight month and coming off of a 20.0% April decline to 32.9, which snapped a a run of 128 months of growth;
• employment saw a 1.8% increase, to 31.8, contracting for the third consecutive month; and
• supplier deliveries, at 67.0 (a reading of 50 or higher indicates contraction), slowed at a slower rate for the 12th consecutive month, following April’s 78.3 reading, which was its highest reading ever recorded

Other notable metrics in the report included a 0.5% increase in prices, to 55.6, up for the second straight month, and inventories headed up 1.1% to 48.0, down for the third straight month. New export orders, at 41.5, grew by 5.2%, contracting at a slower rate for the third consecutive month, coming off of April’s 36.3, its lowest reading going back to November 2008’s 34.5. And imports, at 43.7, slipped 5.6%, contracting for the third straight month and down for the seventh time in the last nine months. Backlog of orders, at 46.4, were down 1.3%, down for the second straight month and following April’s 7.3% decline, to 47.7, its steepest decline since September 2007.

Comments submitted by ISM members, in the report, primarily focused on the challenges coronavirus have created for non-manufacturing, or service-based, sectors.

An Agriculture, Forestry, Fishing & Hunting respondent stated that demand seems to have bottomed out, with his company seeing signs of increasing interest, adding that inventories of finished goods are extensive, with production expected to slowly rebound in the coming months. And a public administration respondent said that COVID-19 is still significantly impacting revenue and the prices being paid for goods and services.

In an interview, Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, said that prior to the recent civil unrest and events of the past week, related to the death of George Floyd in Minneapolis, non-manufacturing seemed like it may have been on a path to recovery.

“I think we were bottoming out [in April] as far as the rate of contraction dropping significantly, with some of the NMI indexes in the 20s and 30s, but are now back into the 40s,” he said. “Even with the composite being buoyed by supplier deliveries, things were boding well for the non-manufacturing sector and that things were on this road to recovery. The indications were that the latter part of 2020 would be positive, with stay-at-home restrictions being lifted and businesses starting to re-open, albeit at less capacity. These recent events are more than an impediment; they are catastrophic, when you look at what is going on with this civil unrest. It has derailed everything at this point. These businesses that were re-opening are now shutting their doors and mostly impacting metropolitan areas like New York, Los Angeles and others. The challenge is those areas are where a good percentage of the economy is driven from and has really put a damper on things.”

Nieves noted that the data in this report was compiled and collected prior to these recent events of the last week, explaining that most companies were geared towards how to strategize conducing business and getting back to normalcy, which has been subsequently derailed.

When asked about May’s NMI data on balance, Nieves said it really speaks to how bad of a month April was.

“It was just awful,” he said, “and we did not capture the full picture in March, because the first half of March had pretty decent numbers that pushed through the balance of the month but we started seeing the effects of COVID-19 in the latter part of March and in full force in April. Now, in early June, it is more about how there was forward-thinking optimism and now that has kind of gone to the wayside.”

Looking ahead, Nieves said that prior to the events of the past week there was optimism that growth was in the cards, but now it is a matter of how quickly things go from here.

“You have a combination of a pandemic, social injustice, civil unrest and everything being politicized on top of that,” he said. “It is like a vortex and does not make for a good equation right now. At the end of the day, people can be shortsighted and it does not matter which side of the aisle you are on or how you feel about civil liberties or anything else. The shortsightedness is to react, cause mayhem, or stir the pot…and all it does is derail the economy. This is further detracting from trying to get everyone in a positive position.”

As for what the May numbers indicate from a supply chain perspective, Nieves said that the top takeaway is that demand remains down and capacity is strained, due to lessened resources.

“That is what you are seeing along the lines of online distribution and online retail,” he said. “Everything has slowed. Backlog of orders are at 46.4, and supplier deliveries are really slow. That is a combination of capacity utilization and resources, yet demand is down considerably. It is just in certain areas that demand is still up.”