The Institute for Supply Management’s (ISM) non-manufacturing index fell by 3.1 points to 57.6 in December. The headline print undershot consensus expectations, which called for the index to pull back to 58.5.
Details of the report were also on a soft side. Aside from new orders, which ticked up to 0.2 points to 62.7, the remaining four of the index’s five subcomponents that make up the headline number declined on the month.
Business activity subcomponent fell from its cyclical high level, declining by 5.3 points to 59.9. Meanwhile, the employment subcomponent deteriorated for the third consecutive month (-2.1 to 56.3). Supplier deliveries declined five points to 51.5, indicating faster deliveries. Prices pressures have also eased meaningfully, with the prices paid subcomponent falling by whopping 6.7 points to 57.6. Computers and peripherals, gas and oil products, lumber products, and steel products were reported to be among commodities where prices fell on the month.
Trade-related components (which are not seasonally adjusted), registered slight improvement, with export orders rising (+2.0 to 59.5) and import orders growth slowing (-1.0 point to 53.5).
Comments from business owners suggest that they remained upbeat on their year-end performance, but the outlook for 2019 is marked by worries, including trade, higher interest rates, labor shortages, and higher material prices.
Key Implications
As is often the case, the ISM non-manufacturing index joined its manufacturing counterpart last month, with the pace of expansion slowing in December. After staying above 60-points for three consecutive months – the best three month streak since its inception – some payback was expected. Overall, the index remains at a high level, but the decline underscores that the high water mark in economic growth may be behind us.
Not all news was bad. Encouragingly, new orders managed to edge higher from the already elevated level. Falling oil prices, a temporary truce in a trade dispute with China, and a renegotiated NAFTA agreement with Canada and Mexico also provided some reprieve from rising input prices that have been squeezing profit margins. It remains to be seen if recent declines will be sustained. In the meantime, comments from businesses suggest that they are hoping for the best, but are preparing for further price increases in 2019.
Firms continue to report challenges in filling positions, with the employment subcomponent declining for the third month in a row. While last week’s payroll report delivered an impressive headline, the slowdown in the employment subcomponent suggests that this may be the last hurrah before supply constraints begin to weigh on job creation.
