Non-manufacturing companies more cautious about second half

Commodity costs, fuel and energy negatively affect corporate outlooks.

By Allison Manning, Associate Editor -- Modern Materials Handling, 8/6/2008

Non-manufacturing sector companies are acting more cautiously in the second half of the year, feeling the impact of rising costs, according to the Institute for Supply Management’s Report On Business. 

“While still positive,” a wholesale trade respondent said, “the overall outlook for 2008 for our company is not as high as earlier in the year.”

The non-manufacturing sector contracted for the second consecutive month, with the 49.5% NMI up slightly from June’s 48.2%.   

A reading above 50% indicates the non-manufacturing sector economy is generally expanding; below 50 indicates the non-manufacturing sector is generally contracting.

“Commodity costs, fuel and energy have definitely impacted the non-manufacturing sector,” Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management Non-Manufacturing Business Survey Committee, told Modern. “We’re hearing that from all our respondents.”

Nieves said many members initially expected the second half of the year to be better. But with rising costs, they have become more cautious.   

An integral part of members’ business is fuel cost, Nieves said. The recent drop in the price of oil could have a positive impact.

A health care & social assistance respondent said they “continue to see slowdown in local economy.” 

Most indexes held steady, with the biggest change a 4.5 point drop between June and July for new export orders – contracting from 52 to 47.5%.

Nieves called the employment index, which had a 3.3% change and was still contracting, “alarming.” 

“In this non-manufacturing sector … employment is good indicator of the health and viability of companies,” he said.

For the 134^th consecutive month, respondents called their inventory “too high,” with inventory sentiment registering 62.5%. The prices index decreased 3.7 points to 80.8% in July, indicating a slower rate in price increases than in June. 

Business levels are also down, Nieves said, leading to questions as to why supplier delivery is slowing and backlog is increasing. Cutbacks internally have caused slower delivery, despite little change in inventories.

“Because we’ve been in this valley for such a period of time,” he said, “these companies’ ability and capacity to turn around has slowed.” 

Nine industries reported growth in July, including

• ·         Real estate, rental and leasing
• ·         Arts, entertainment and recreation
• ·         Other services
• ·         Professional, scientific and technical services
• ·         Educational services
• ·         Utilities
• ·         Construction
• ·         Accommodation and food services
• ·         Health care and social assistance 

The six reporting contraction included finance and insurance; public administration; wholesale trade; information; transportation and warehousing; and retail trade.