Institute for Supply Management’s (ISM) non-manufacturing index rose 0.5 points to 57.4 in June. The headline print came in firmly above market consensus which called for a modest decline to 56.5.
Gains were broad-based with the majority of the survey components accelerating in June. All of the subcomponents are now in expansionary territory, including prices and imports that had previously been in contractionary territory.
Among the main sub-indicators, new orders rose 2.8 points to 60.5, prices paid rose 2.9 points to 52.1, while business activity also recorded a small uptick (+0.1 to 60.8). On the other hand, the employment sub-index pulled back 2 points to 55.8, following a healthy 6.4 point increase in the month prior.
Comments from survey contacts remained largely positive. Nearly all non-manufacturing industries surveyed reported growth in June, with ‘Other Services’ being the only exception.
Key Implications
Similar to its manufacturing equivalent, the ISM non-manufacturing index surpassed market expectations and accelerated in June. What is more, the index remains firmly in expansionary territory and comments from contacts remain largely positive with most industries reporting growth last month. Improvements among most of the main subcomponents including new orders and business activity, both of which have continued to outperform the overall index for most of the post-recession period, added to the encouraging headline print.
While the employment component pulled back slightly, this followed a large gain in the month prior. Overall, the sub-index remains on a decent footing relative to the experience of the last two years, boding well for a respectable print for June’s payrolls report tomorrow.
The improvement in the prices paid sub-index was encouraging at first glance, with the component moving back to expansionary territory in June. Nonetheless, the index failed to recoup the significant ground lost in the month prior, with the prices sub-index remaining lower on a year-over-year basis for a second consecutive month – mirroring the same trend in the manufacturing survey. All told, this implies some additional softness for overall price pressures. While yesterday’s minutes from June’s FOMC decision suggest that most Fed officials see the recent price weakness largely as transitory, slowing inflation remains the main risk to the pace of policy rate normalization.
