Even with a slight decline, non-manufacturing remains on a growth path, says ISM

The May edition of the Institute for Supply Management’s (ISM) Non-Manufacturing Report on Business continued where April’s left off–still on a growth track.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 55.7 in May which was 2.1 percent below April (a level of 50 or higher indicates growth) and also 1.5 percent below the 12-month average of 57.2. Economic activity in the non-manufacturing sector has grown for the last 64 months, while the overall economy has grown for the last 70 months, according to ISM.

Each of the report’s four core metrics in May, including the NMI, was down compared to April. Business Activity/Production was down 2.1 percent at 59.5 while still growing at a faster rate for 70 straight months. New orders were down 1.3 percent to 57.9 while also growing for the 70th month in a row, and employment dropped 1.4 percent to 55.3 while growing for the 15th straight month.

Fifteen non-manufacturing sectors reported growth in May, with only one, mining, reporting contraction.

ISM noted in the report that comments submitted by ISM member respondents featured in the report were mostly positive about business conditions and indicated economic growth in the non-manufacturing sector is likely to continue.

An educational services respondent said that a moderate recovery continues with all signs pointing to rebound in the fourth quarter. And a professional, scientific, and technical services respondent observed that the current level of new orders is still flat, but an uptick is expected in the near future.

“The PMI for May is a 12-month low but when you look at the small window between the low and high [58.8 in November 2014] and the current average of 57.2, the difference is slight, coupled with 64 months of growth,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “And there is also more than five years of growth for business activity and new orders, and employment growth, too. Each of these was down from April but they are still in a good place. Overall, the report speaks to growth, which is also intact on the manufacturing side. That said, the economy overall looks pretty good, as it is more about sustainable growth than looking at some strong upticks here and there.”

Looking ahead, Nieves said how things go with summer here will be somewhat contingent on what happens on the retail side, coupled with consumer confidence, and other factors, like fuel prices, and how they transpose into economic gains and confidence levels.

Non-manufacturing prices rose 5.8 percent in May to 55.9, which was in line with the 9 percent prices bump on the manufacturing side. Many of the commodities up in price were petroleum and petroleum-based commodities, as well as food-based ones, too.

May supplier deliveries were down 3.5 percent to 50.0, with inventories flat at 51.0, and backlog of orders down 6.0 percent to 48.5.

Nieves said that when it comes to these three metrics, flat inventories, coupled with supplier deliveries essentially unchanged from April to May, it comes back to flat inventory growth and mild declines in business activity and new orders.

“These factors make it unsurprising that supplier deliveries are not getting any slower,” explained Nieves.

With the mid-year of 2015 nearly here, Nieves said that things are shaping up for non-manufacturing to continue being on its current growth path, which he expects to be incremental and sustainable.