ISM Non-manufacturing activity index strong even with a sequential decline from February to March

Despite a sequential decline, non-manufacturing activity in March remained positive, according to the March edition of the Institute for Supply Management’s (ISM) Non-Manufacturing Report on Business.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 56.0 in March, down 1.3 percent from February’s 57.3, which was the highest NMI reading since January 2011. A reading above 50 represents growth. The March ISM Manufacturing Report on Business, which was released earlier this week week, was up 1.0 percent at 53.4. With the March NMI firmly above 50, economic activity in the non-manufacturing sector has grown for the last 27 months, according to ISM.

Three of the four core metrics in the report showed declined from February to March. Business Activity/Production was down 3.7 percent at 58.9, and New Orders were down 2.4 percent at 58.8. Employment was the lone core metric heading up with a 1.0 percent gain to 56.7.

“We still have expansion and good growth occurring,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “It was very strong during the first quarter and even with a little bit of a dip now, it really isn’t a true decrease as much of a slightly lower rate of growth, which is still strong. All indications are that we are still humming along pretty good.”

Comments from ISM NMI survey respondents included in the report make the case for non-manufacturing activity being on steady ground.

A wholesale trade respondent stated that 2012 continues ahead of forecasted pace through March, and a retail trade respondent said that auto sales are doing much better than expected, with forecasted sales volumes being revised upward.

“A key thing to keep in mind with this month’s report is that March is following a February that saw both Business Activity and New Orders over 60 [62.6 and 61.2, respectively],” said Nieves. “For these numbers to each be in the upper 50 percent range reflects a good rate of growth from month to month.”

And with Employment up a point in March, Nieves stressed that what happens with jobs and job growth is really what is going to dictate the direction of the economy on the non-manufacturing side for services-related companies.
The slight PMI decrease in March, which was preceded by strong growth in January and February, still reflects a strong beginning to 2012, driven in large part to higher consumer confidence occurring as a result of improved employment data, due to increases in discretionary spending for things like automobiles, coupled with an uptick in housing starts.

Supplier Deliveries in March were flat at 49.5, and Inventories were up 0.5 percent at 54.0. Prices dipped 4.5 percent to 63.9.

Even with a decline in prices, Nieves explained that the cost pressures are still there for companies, especially with fuel prices and fuel surcharges and various petrochemical-related products.

Backlog of Orders fell 3.5 percent to 49.5 and is directly tied into the aforementioned New Orders, which dropped 2.4 percent to 58.8.

“Inventories are up slowly and companies are burning them off, which is why supplier deliveries have not slowed and why backlog of orders is down, too,” said Nieves. “What we may see down the road is that as business picks up, supplier deliveries will slow down, backlogs increase, and in inventory buildup as well.”