Materials handling business: ISM Non Manufacturing Index is down but continues to show growth

Like its companion report, which focuses on the manufacturing sector, the Institute of Supply Management’s (ISM) June report on the non-manufacturing sector showed continued growth albeit at a reduced rate.

The ISM’s index for measuring the sector’s overall health—known as the NMI—hit 53.8% in June, a 1.6% decline from May. And like the ISM’s manufacturing index, a reading above 50% or higher represents growth. June marks the sixth consecutive month the NMI is more than 50%.

The sequential decline in the NMI carried over to other key metrics of the report, including: the Business Activity Index down 3 points to 58.1%; the New Orders Index down 2.7 points to 54.4%; the Employment Index down 0.7 percentage points to 49.7%; and the Prices Index down 6.8 points to 53.8%.

“We are still in growth mode, but it is slowing somewhat,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “This is indicative of what other recent economic reports are also saying as the economy is starting to moderate. The key is we still have growth in New Orders although it is softer than the previous month. It is disappointing to see unemployment down, but that is reflective of what we are seeing elsewhere in the economy.”

Other NMI metrics that took a step back in June were Inventories, which declined by 4.0% to 58.5, Backlog of Orders, which fell 0.5% to 55.5, New Export Orders, which fell 5.5% to 48.0%, and Imports, which fell 8.5% to 48.0.

Nieves said the trending down of these metrics is consistent with previous summer months in that there is typically a bit of a dip in these numbers. Regarding Exports, he explained that about 70% of ISM NMI respondents do not perform, or do not separately measure orders for work outside of the U.S. But 30%, which is a strong number do, adding that the economic unrest in Europe and market declines in Asia are dinting export performance.

And with retail sales and consumer confidence data showing declines of late, Nieves said the second half of the year needs to show some sustained growth.

“We want to see sustainable growth,” said Nieves. “So even if the growth is slow and the [NMI] stays above 50 and does not contract, it is good. The economy will likely be stronger in 2011 but in 2010—as long as we stay on the path of slow, incremental, sustainable growth—we are in good shape.”