ISM NMI remains on a positive growth track in March

The Institute for Supply Management’s (ISM’s) index for measuring the sector’s overall health—known as the NMI—was 57.3 in March, 2.4 percentage points less than February’s 59.7. But despite the slight decrease, a reading above 50 represents growth.

The NMI’s total reading is largely based on four core metrics. In March, they all showed declines to a certain degree, with Business Activity/Production down 7.2% at 59.7, New Orders off 0.3% at 64.1, and Employment falling 1.9% to 53.7.

“It is still continued growth even if it has slowed down a bit,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “The composite was dragged down by the Business Activity index, but New Orders has not come down much. Some of this could have to do with cycle time, in terms of New Orders coming in and not immediately being part of the Business Activity mix, as that varies by industry and company.”

Even though the NMI is down, March’s reading is still very strong, especially when compared to March 2010, said Nieves and when compared to the growth rates of the previous two months.

And the 0.3% decline in New Orders essentially offsets the 7.2% drop in Business Activity/Production, given the strong overall reading, noted Nieves.

Japan situation: “In non-manufacturing, we are not going to see the impact of things from the situation in Japan, and Japan is importing many components it uses in manufacturing, while it does not manufacture as much as other countries in the Asia-Pacific,” said Nieves.

ISM survey respondents in the agriculture, forestry, fishing, and hunting sectors noted that while current business levels are steady, there is concern about high fuel costs and the speed of the Japanese recovery, which has a more direct impact on those sectors.

“What is happening in Japan will have a more direct impact on manufacturing than non-manufacturing,” said Nieves.

Looking at the NMI Prices, March Prices slipped 1.2% to 72.1, which Nieves said is still strong and more directly related to increasing fuel prices rather than high commodity prices, which are also up.

Fuel is particularly important to the distribution component of the non-manufacturing sector through over-the-road trucking and has a significant impact on the costs of goods sold for non-manufacturing operations.

“Increases in fuel and other petroleum-related products always result in price increases for things like plastics and other things,” said Nieves.

March Inventories were flat compared to February at 55.0 and Supplier Deliveries were down only 0.5% at 51.5. Nieves noted that Inventories actually grew from February but it occurred at the same rate. And with Inventories growing, he said Supplier Deliveries have not been impacted.

“What is interesting when looking at those numbers is that Backlog of Orders in March was up 4.0% from February at 56.0%,” said Nieves. “This leads me to believe that the current capacity levels can be supported at the moment.”

Looking at the overall growth for the first quarter of 2011, Nieves said the NMI has exceeded expectations, especially in January and February. Because of this he noted the “bar has been raised,” especially when compared to the first quarter of 2010.