December non-manufacturing output drops but shows growth for all of 2018

Non-manufacturing activity in December finished 2018 with a decrease compared to November, while still maintaining a prolonged stretch of growth, according to the Non-Manufacturing Report on Business, which was issued by the Institute for Supply Management (ISM) today.

The index ISM uses to measure non-manufacturing growth—known as the NMI–fell 3.1% in December to 57.6 (a reading above 50 indicates growth), following a 0.4% increase from October to November. This marks the 107th consecutive month of growth for the NMI, with the December NMI off 1.3% compared to the 12-month average of 57.6. 

ISM reported that 16 non-manufacturing sectors reported growth in December, including Arts, Entertainment & Recreation; Transportation & Warehousing; Health Care & Social Assistance; Retail Trade; Information; Utilities; Accommodation & Food Services; Professional, Scientific & Technical Services; Public Administration; Other Services; Finance & Insurance; Wholesale Trade; Agriculture, Forestry, Fishing & Hunting; Educational Services; Construction; and Management of Companies & Support Services. The only industry reporting a decrease in December was Mining, according to ISM.

The report’s key metrics, including the NMI, were mostly down in December, including:

• business activity/production down 5.3% to 59.9, but still growing for the 113th month in a row;
• new orders rose 0.2% to 62.7, growing for the 95th consecutive month;
• employment was off 2.1% to 56.3, growing for the 58th consecutive month;
• supplier deliveries were down 5% to 51.5 (a reading above 50 indicates contraction), falling for the 36th consecutive month; and
• prices dropped 6.7% to 57.6, up for the 34th consecutive month

Comments from ISM member respondents included in the report were mostly positive, with some macroeconomic concerns remaining intact.

A construction respondent pointed to a significant slowing in new residential home sales, adding that the while the tariff delay slowed material cost increases, indications point to January bringing price increases. And a real estate rental & leasing respondent noted that business is exceeding expectations, with 2019 expected to equate or exceed 2018.

“There was a bit of a pullback from November to December, but there is also no cause for alarm, as the last three or four months have been so strong, in terms of NMI readings, that we were wondering how sustainable it would be,” said Tony Nieves, chairman of the ISM’s Non-Manufacturing Business Survey Committee. The 57.6 December NMI is coming off of a 60.7 reading in November, which remains a very strong number.”

Nieves also pointed to the December business activity/production number of 59.9 as being very strong, even in comparison to November’s 65.2 reading, which is very strong. And he said that the new orders reading, at 62.7, continues to show ongoing strength in the non-manufacturing pipeline.

Looking at inventories, supplier deliveries, and backlog of orders for December, Nieves said they each share the common theme of being logistics-oriented, coupled with sentiment from ISM member respondents that there appears to be a lessening in capacity constraints that is directly correlated to the level of demand as well.

And while non-manufacturing inventory readings are “less impacting” than they are on the manufacturing side, Nieves said there is still a correlation, in the inventory burn off there, which he said also helps lead to a slowing supplier deliveries number that dropped 5% to 51.5, as well as a decline in backlog of orders, which fell 5% to 50.5.

“That shows capacity waning, with companies using inventory to supplement orders, as there was a buildup going into the holidays,” he said.

When asked for a 2019 outlook, Nieves said that the non-manufacturing sector has a lot working in its favor in the form of strong new orders and business/activity production readings, as well as last week’s encouraging jobs report numbers, too.

“Much depends on what is happening geopolitically, in the sense that it is the psyche and the uncertainty of companies themselves on doing well and what they do is look at their strategic plans and capital expenditures landscape and hold back a little bit and see what the landscape is,” he said. “They want to keep their powder dry in the storm, so to speak. So, once some of these things need to get addressed, like the trade talks, which seem encouraging for the most part, and the federal government shutdown, which will eventually end. Once there is a resolution there, I think the economy is going to pick up. It may not be as strong as what we saw through 2018, but a key White House economic advisor said there is no recession in sight, and I tend to agree. There are some key fundamentals in place right now.”