August non-manufacturing activity is strong, reports ISM

The Institute for Supply Management (ISM) reported today in its Non-Manufacturing Report on Business that non-manufacturing activity in August showed another month of growth.

The index ISM uses to measure non-manufacturing growth—known as the NMI–increased 2.8% to 58.5 (a reading above 50 indicates growth), nearly erasing a 3.4% decline from June to July’s 55.7. The August NMI is 0.2% above the 12-month average of 58.3. The PMI has now grown for 103 consecutive months.

ISM said that 16 non-manufacturing sectors reported growth in August, including: Construction; Transportation & Warehousing; Retail Trade; Educational Services; Other Services; Real Estate, Rental & Leasing; Public Administration; Management of Companies & Support Services; Wholesale Trade; Mining; Accommodation & Food Services; Health Care & Social Assistance; Finance & Insurance; Utilities; Professional, Scientific & Technical Services; and Information. The only industry reporting a decrease is Agriculture, Forestry, Fishing & Hunting.

The report’s key metrics, including the NMI, were up in August, including:

• business activity/production was up 4.2% to 60.7, growing for the 109th month in a row;
• new orders were up 3.4% to 60.4, but still growing for the 91st consecutive month;
• employment increased 0.6% to 56.7, growing for the 54th consecutive month;
• supplier deliveries slowed down at a faster rate% at 56.0 (a reading above 50 indicates contraction) and slowing for the 32nd straight month;
• prices fell 0.6% to 62.8 growing for the 30th straight month;
• inventories were flat at 53.5, heading up for the seventh month in a row; and
• backlog of orders saw a 5% increase to 56.5, up for the eighth straight month

Sentiment on the non-manufacturing sector based on comments submitted by ISM member respondents was largely positive, although concerns relating to tariffs remained intact.

A construction respondent said that tariff-related cost increases are beginning to accelerate, whether they have been put into place or not. And a real estate, rental and leasing respondent noted that business has increased, citing various factors for growth, including demand and a positive economic outlook. A wholesale trade respondent pointed out that demand for transportation has started earlier than normal, with the railroad sector announcing peak season surcharges sooner that took effect on August 1, leaving the respondent’s company in a situation where it had to re-adjust inventory levels sooner than expected.

“This was a nice rebound from July, which was a 12-month running low,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “It was nice to see both business activity and new orders over 60, coupled with the [ISM] manufacturing side having a record month in August. That is also a leading indicator for non-manufacturing.”

Despite the solid data in this report, Nieves said the sector is dealing with some capacity constraints, with deliveries slowing and backlog increasing, and inventories having now grown at the same rate from June through August. He also noted that prices remain strong, with inflation occurring but not strong inflation, instead it is for specific commodity groups like petroleum and petroleum-based products, precious metals, and food items with volatility.

Imports in August slipped 0.5% to 52.0 and grew for the sixth straight month, and new export orders rose 2.5% to 60.5, growing for the 19th straight month.

Based on feedback from ISM member respondents, Nieves said that the tariff situation brings a degree of uncertainty, even though at this point in time it has not really pulled through in terms of increasing costs for goods sold, especially when compared to manufacturing, with manufacturers absorbing those costs upstream in the form of competition and transparency into pricing and not yet resulting in increases in prices of goods sold just yet.

Logistics-related challenges remain a concern as well, Nieves noted, in the form of slower rail service and overland trucking capacity continues to be an issue, too.

“The overall outlook for non-manufacturing in the overall economy remains positive,” he said. “This rate of growth seems to be sustainable. Consumer confidence is up, and so is discretionary spending. This administration seems to be more business-friendly, so on the commercial side we will have to see how steady it holds. Things should continue on this current trend. People are wondering when a recession may hit, but the way corporate profits are, I don’t see it in the foreseeable future.”