Despite coronavirus issues, non-manufacturing is solid in February, says ISM

While February is the shortest month of the calendar year, it was long on solid growth for non-manufacturing, according to the most recent edition of the Non-Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 57.3 in February (a reading of 50 or higher indicates growth is occurring), which topped January’s 55.5 by 1.8%. The NMI headed up for the 121st consecutive month, and the February NMI is 4% above the 12-month average of 55.3, as well as the highest reading over that span.

ISM reported that 16 non-manufacturing sectors reported growth in February, including: Accommodation & Food Services; Management of Companies & Support Services; Mining; Finance & Insurance; Real Estate, Rental & Leasing; Other Services; Construction; Health Care & Social Assistance; Public Administration; Wholesale Trade; Transportation & Warehousing; Educational Services; Professional, Scientific & Technical Services; Utilities; Information; and Retail Trade. The two industries reporting a decrease in February are: Arts, Entertainment & Recreation; and Agriculture, Forestry, Fishing & Hunting.

The report’s key metrics were positive in February, with:
-business activity/production down 3.1% to 57.8,  coming off of a very strong January and growing for the 127th month in a row;
-new orders up 6.9% to 63.1, also up for the 127th month in a row, for its highest reading going back to June 2018’s 63.1;
-employment rose 2.5% to 55.6, growing at a faster rate for the 72nd consecutive month;
-supplier deliveries slowed at a faster rate, from 51.7 in January (a reading above 50 indicates contraction) to 52.4 in February, slowing for the ninth consecutive month;
-prices decreased 4.7% to 50.8, growing at a slower rate for the 33rd consecutive month; and
-inventories rose 7.4 to 53.9, resuming growth after contracting for the first time in six months in January

Themes in the report submitted by ISM member respondents were again mixed, with comments pointing to a positive outlook, the coronavirus, and a challenging labor market, among others.

In an interview, Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, said that the coronavirus is definitely having an impact, in that it is a moving target, presenting business uncertainty from one day to the next, with the caveat that it needs to be kept in perspective, given the relatively low number of cases in the United States.

“It is definitely impacting supplier routes, especially out of Asia,” he said. “But it has not derailed the report’s numbers so far. I think the uncertainty and fear factor has got people concerned right now.”

Addressing the report’s key metrics, Nieves noted that, for Business Activity/Production, even with a 3.1% decline and coming off a very strong January, it remains well above the baseline and showing good growth.

And he said it is a similar theme for New Orders, which tells a positive story of what is in the pipeline, as long as orders don’t get derailed by the impact of the coronavirus. On the employment side, he said that even with limited labor resources, growth did not suffer.

What’s more, Nieves touched upon the recent move by the Federal Reserve to lower interest rates by 0.5% to counter business impacted from the coronavirus, which he viewed as a good move for the U.S. to compete with global markets that are stimulating themselves with lower interest rates, as the U.S. rates are higher than those in Europe and other countries.

“Nobody knows where we are going with this virus,” he said. “But it needs to be kept in proper context, given the few cases there are. “I hope it is contained, given how it has spread across continents.”

Perhaps the biggest impact of coronavirus is its impact on the Chinese economy for imports and exports in both non-manufacturing and manufacturing, observed Nieves.

“We need to keep an eye on that, as well as what is going to happen in Europe, he said. “We have seen some shifts in business, especially in the information world and professional, scientific, and technical services companies, as it relates to the strife we are having over digital markets, among others. Those are the things we need to keep an eye on.”

On a year-to-date basis, Nieves said non-manufacturing business conditions are ahead of expectations, as January was decent, even though there is typically some post-holiday malaise. And putting aside the coronavirus, he said consumer confidence remains high, with conditions boding well, should the coronavirus pandemic subside.