Non-manufacturing activity shows strong September rebound, reports ISM

September showed strong gains for non-manufacturing activity, according to data issued by the Institute for Supply Management (ISM) in its Non-Manufacturing Report on Business. Like its sibling Manufacturing Report on Business, which was released earlier this week, September showed a nice jump in comparison to a relatively mundane August.

The index ISM uses to measure non-manufacturing growth—known as the NMI—came in at 57.1 (a level of 50 or higher indicates growth) in September, a 5.7 percent improvement over August, with economic growth for the non-manufacturing sector now intact for 80 consecutive months. And the September NMI is 2 percent above the 12-month average of 55.1.

Each of the report’s four key metrics, including the NMI, saw impressive gains in September. Business activity/production was up 8.5 percent at 60.3 while still growing for the 86th month in a row, and new orders rose 8.6 percent to 60.0 also growing for the 86th consecutive month. Employment jumped 6.5 percent to 57.2 and grew for the fourth straight month.

ISM said that 14 non-manufacturing industries saw growth in September, including Agriculture, Forestry, Fishing & Hunting; Utilities; Retail Trade; Management of Companies & Support Services; Information; Health Care & Social Assistance; Transportation & Warehousing; Finance & Insurance; Construction; Other Services; Wholesale Trade; Public Administration; Accommodation & Food Services; and Professional, Scientific & Technical Services. And it added that the four industries reporting contraction in September are: Mining; Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; and Educational Services.

Comments submitted by ISM member respondents in the September report were very positive. A professional, scientific, and technical services respondent cited solid, steady growth, and a retail trade respondent observed that sales continue at an increased pace from last month.

Before diving into the September numbers, one needs to take a look back at August,  said Tony Nieves, chair of the ISM Non-Manufacturing Committee, explaining that it marked a significant “cooling off” from July, which raised concerns about what was going on in the sector.

“That raised the question of what would September bring, as August suggested it may not be sustainable,” he said. “And because we are measuring change from month to month, it is coming from such a low point, that growth would show such a substantial spike month-over-month. But if you look back to last year, we were pretty steady going from August to September to October, with October being the strong, pivotal month last year versus September. These are the highest numbers we have seen for both the NMI and Business Activity/Production since October 2015, and by coming off the low point in August, that is why we are seeing this type of growth in September.”

September’s employment output, according to Nieves, was the most significant metric of the report, even though new orders had a higher percentage change. The reason for that is that as employment goes, the non-manufacturing sector goes, he said.

And that premise leads to a question of capacity utilization, with the business threshold requires the addition of more human resources, he said.

Other notable metrics in the report included:
-supplier deliveries down 0.5 percent at 51.5 (above 50 for this metric means it contracted);
-prices up 2.2 percent to 54.0;
-backlog of orders up 2.5 percent to 52.0; and
-inventories up 3.5 percent to 51.5

Looking ahead, Nieves said September represents a pivotal month in terms of what the fourth quarter is going to look like.

“Hopefully we will see some sustainability going forward,” he said. “The numbers look encouraging from a strong finish, but we need to wait to see what happens.”