Non-manufacturing activity remains in growth mode in February, reports ISM

While not quite at the level it hit to start the year, non-manufacturing activity in February was solid, according to the the Institute for Supply Management’s (ISM) Non-Manufacturing Report on Business, which was released today.

The index ISM uses to measure non-manufacturing growth—known as the NMI––dipped 0.4% to 59.5 in February (a reading above 50 indicates growth), which is slightly below January’s all-time high NMI reading. This reading indicates non-manufacturing growth has now been intact for 97 consecutive months, with the overall economy growing for the 102nd consecutive month.

February’s NMI is up 2.1% compared to the 12-month average of 57.4. And the rolling three-month average of 58.5 is up 1.1% compared to the 12-month average.

ISM said that 16 non-manufacturing industries reporting growth in February — listed in order — are: Educational Services; Transportation & Warehousing; Utilities; Real Estate, Rental & Leasing; Wholesale Trade; Finance & Insurance; Management of Companies & Support Services; Professional, Scientific & Technical Services; Health Care & Social Assistance; Other Services; Construction; Mining; Public Administration; Retail Trade; Agriculture, Forestry, Fishing & Hunting; and Information. The two industries reporting contraction in February are: Arts, Entertainment & Recreation; and Accommodation & Food Services.

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

business activity/production was up 3% to 62.8 and growing for the 103rd month in a row;
new orders were up 2.1%, growing for the 85th consecutive month;
employment was down 6.6% to 55 and growing for the 48th consecutive month, coming off of a new all-time high in January;
supplier deliveries flat at 55.0 (a reading above 50 indicates contraction) and slowing for the 26th straight month;
prices fell 0.9% to 61.0; and
inventories were up 4.5% at 53.5
Comments submitted to the report by ISM member respondents were mixed. A construction respondent noted that lumber-related costs continue to increase as supply is also starting to become a problem adding that the market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning. A wholesale trade respondent said that domestic transportation is still a challenge with slower than normal transit times, with both intermodal and over-the-road carriers are struggling [with] the electronic data logs (ELDs) now required on all tractors. And a healthcare and social assistance respondent explained that the over all outlook is employment is low, and prices are up.

Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, said this was a solid report that would have been even better were it not for the steep decline in the employment reading.

“There was strong employment growth in January, with the replenishment of resources from 2017 and an optimistic economic outlook and with consumer confidence where it is now, companies are feeling very good,” he said. “They are growing their ranks as best as they can, but it is hard to sustain that rate of growth month over month as the baseline moves and the labor market is tight.” 

Nieves also pointed to another strong month of new orders in February as very strong, with the caveat that it may not be as strong next month but is expected to remain strong going forward.

Looking ahead, he explained that new orders and business activity/production always require a watchful eye, while also noting that employment is a key metric to monitor.

“In this case it is a misnomer, as I have always said that how employment goes is how the index goes,” he said. “But it is tough because only so many resources can be added from what is already a thin labor pool to start with.”

One thing having an impact on the market, he said, as outlined in the respondent comments, are logistics-related issues, brought on by a shortage of trucking capacity and drivers, which he said is an issue and also impacting backlog of orders (up 5.5% in February to 56.0) and supplier deliveries.

When asked for a short-term non-manufacturing outlook through June, Nieves said that indications point to continued growth, with the rate to be determined, due to things like the recently announced steel and aluminum tariffs by the White House. But with consumer confidence now at all-time highs since 2000, coupled with business confidence up, and the recently enacted tax reform bill, things are set up for growth.