The Institute for Supply Management’s (ISM) non-manufacturing index rose by 0.5 points to 59.1 in June, which marked the second consecutive monthly improvement. The rise defied expectations for a moderate pullback to 58.3.
The underlying details of the report were mixed, with indices such as employment (-0.5 to 53.6) and supplier deliveries (-3.0 to 55.5) giving back last month’s gains (+0.5 and +4 points respectively), returning near April levels.
On the other hand, indices that are already near multi-year highs such as business activity (+2.6 to 63.9) and new orders (+2.7 to 63.2), continued to improve for the second and third consecutive months, respectively. New export orders also improved 3 points to 60.5, partially recovering from last month’s 4 point decline.
Among the remaining subcomponents, the backlog of orders (-4.0 to 56.5) and prices (-3.6 to 60.7) retreated, after a surge in the month prior.
The vast majority of industries reported growth on the month, with agriculture, forestry, fishing & hunting being the only exception. Comments from survey respondents remained upbeat with respect to business conditions and the overall economy, but there is a continuing concern related to “tariffs, capacity constraints, and supply deliveries”. Respondents point out that trade issues are having an “inflationary influence on costs” (construction), and are “creating price uncertainty” (management).
Key Implications
Similar to its manufacturing counterpart, the ISM non-manufacturing index defied expectations and improved for the second consecutive month in June. While concerns over trade uncertainty were top of mind and featured heavily in the comments section, they have so far failed to meaningfully darken the outlook among U.S. nonmanufacturing firms. The recent ISM prints are consistent with an economy that is running well above capacity, reinforcing our expectations for a second quarter rebound in economic growth to around double its first-quarter pace.
Having said that, trade worries, which could intensify further given the upcoming tariff announcement on $34bn of Chinese exports, coupled with an economy that is bumping up against capacity constraints could materialize in slower growth later this year. What’s more, the current dynamic, which is conducive to rising price pressures, will likely result in further tightening in monetary policy. The FOMC minutes, released at 2pm ET today, will help shed some additional light on this front.
Another important element in today’s report is the employment sub-index. The latter has deteriorated notably over the past few months, alongside its manufacturing equivalent, suggesting that businesses are finding it harder to hire in a very tight labor market. This sub-component in today’s report poses some downside risk for June non-farm payrolls, released tomorrow, further reinforcing our belief for a below-consensus print.
