ISM: Non-Manufacturing Index shows continued growth in October

The Institute of Supply Management’s (ISM) Non-Manufacturing Report on Business for October continued the momentum it showed in September.

The ISM’s index for measuring the sector’s overall health—known at the NMI—was 54.3 in October, a 1.1% gain from September. As is the case with the ISM’s Manufacturing Report on Business, a reading above 50 represents growth. October’s NMI showed growth for the 11th consecutive month, with the index above 50 over that timeframe. ?The NMI’s core metrics all showed gains in October. The Business Activity/Production Index at 58.4 was up 5.6 percentage points, and New Orders at 56.7 were up 1.8 percentage points. Employment at 50.9 was up 0.7 percentage points.

“We are still seeing growth in the composite index, even though it was only up 1.1 percent,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. Business Activity came in strong, and that tells me the levels are definitely heading in the right direction. And we expect to see continued growth with New Orders, too.”

Nieves said it is likely that the NMI will display slow growth overall in the coming months, with the NMI remaining at current levels or rising slightly. He added that Employment over 50 for two straight months is a positive sign, although it is still not where it needs to be.

Until companies have what Nieves described as “real confidence” in the economy, employment data will not fully come back, he said, as many jobs that will never come back have been lost in recent years. But signs of capital investment by companies as noted in this month’s report may have the potential to increase the job count.

Even with low employment, Nieves said that glass is half full more than half empty at this point, adding that what happens during the holiday season will be telling as far as how things stand in the non-manufacturing sector and provide a decent outlook for the future.

“As we enter the holiday season, there tends to be a pickup in activity,” said Nieves. “September is not the strongest month typically. October’s report historically has shown a little bit of an uptick heading on through January, until we see a bit of a dip with January’s post-holiday numbers, followed by an uptick as we get closer to spring.”

On the pricing side, the NMI’s Prices index at 68.3 was up 8.2 percentage points. Nieves said this gain is driven primarily by fuel prices and petroleum-based products. And despite price gains on the fuel side, there is no real pricing power overall, he said, due to a lack of overall demand. This, he explained is because of a lack of business and too much competition.

October Inventories were relatively flat at 47.5 for a 0.5 percentage point gain from September. Inventory numbers at this point are representing contraction, according to Nieves.

“What we are seeing is inventories contracting at a slower rate, so there is still inventory burn off as far as I am concerned,” noted Nieves. “Deliveries are also slowing [at 51.0, down 4.0 percentage points from September] but not as slow as in September. Companies are using inventories to fill orders and are not replacing inventory as fast as they are using it. This is something we will have to keep an eye on—as far as how confident companies are in replacing their inventories in the coming months.”

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