October non-manufacturing output trends up, reports ISM

Non-manufacturing activity showed solid momentum in October, 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 54.7 in October (a reading of 50 or higher indicates growth is occurring), which marked a 2.1% gain over September. The NMI headed up for the 117th consecutive month, and the October NMI is 1.6% below the 12-month average of 56.3.

ISM reported that 13 non-manufacturing sectors reported growth in October, including: Agriculture, Forestry, Fishing & Hunting; Utilities; Professional, Scientific & Technical Services; Transportation & Warehousing; Real Estate, Rental & Leasing; Management of Companies & Support Services; Health Care & Social Assistance; Accommodation & Food Services; Arts, Entertainment & Recreation; Construction; Finance & Insurance; Public Administration; and Information. The five industries reporting a decrease are: Educational Services; Other Services; Retail Trade; Wholesale Trade; and Mining.

The majority of the report’s key metrics, including the PMI, saw gains in October, including:
-business activity/production was up 1.8% to 57, growing for the 123rd month in a row;
-new orders rose 1.9% to 55.6 also up for the 123rd month in a row;
-employment saw a 3.3% gain to 53.7, growing for the 68th consecutive month;
-supplier deliveries slowed at a faster rate, from 51 in September to 52.5 in October (a reading above 50 indicates contraction);
-prices slipped 3.4% to 56.6, slowing for the 29th consecutive month; and
-inventories were down 2.5% to 50.5, rising for the third consecutive month

Themes in the report submitted by ISM member respondents focused on various topics, including business conditions, labor availability, tariffs, and the economy.

An accommodation & food Services respondent noted that the labor shortage remains a major factor in the increased cost of logistics, and a wholesale trade respondent said that business is still lower than this time last year due to tariff issues and a soft market.

In an interview, Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, said that October’s bounce back off of a September decline helps to quell premature talk about a possible recession.

“It was a bit of a cooling off and below expectations in September, coming off of such a strong August, which led to some concerns, but it is only one month,” he said. “The fourth quarter is always good for non-manufacturing, and I felt pretty confident things would improve in October, and I am glad it did meet expectations. It is in line with what we are seeing, with consumers driving the economy right now and low unemployment.”

The employment outlook, he said, cannot get any better than where things currently stand, for the most part, as there is a shortage of workers available, which had been an anchor on employment growth, in that the resources were not there to begin with.

Comparing non-manufacturing and manufacturing, Nieves said the latter is clearly “bearing the brunt” of the trade war, noting that it needed to be addressed and that with a strong economy intact, this remains a good time to address it.

With the fourth quarter underway, Nieves said there is a clear build up through the supply chain as the holiday season approaches, which was anticipated heading into the fourth quarter, coupled with increased spending by companies between now and year-end, because they operate on a calendar year period and not a fiscal year.

In terms of what non-manufacturing sector is the biggest contributor to GDP, Nieves pointed to real estate rental and leasing more so than housing starts, followed by professional, scientific & technical services, agriculture, utilities, transportation and warehousing. These segments, in addition to the other non-manufacturing services showing growth, are what are driving the economy right now, on the non-manufacturing side, according to Nieves.  

Looking ahead to the remainder of 2019, Nieves said it remains hard to pinpoint a specific growth level over that time, for non-manufacturing.

“It is hard to say, because we don’t know what may happen or come out or be undermining to the economy,” he said. “A geopolitical situation could pop up, but I would like to see the NMI go up a point or two, but we will have to see. I had a feeling October would grow, as there was such a strong pull back on September…so considering where everything was, it could only go up. For now, the worst-case scenario is that things could go sideways. That is not going to be a bad thing, as it is still growth month-to-month. We are seeing some progress made on the trade front, there should be a bit of an uptick, so that is going to be a contributor. There won’t be a hike in Fed funds until inflation accelerates…we are seeing little or no inflation right now.”