Institute for Supply Management’s (ISM) non-manufacturing index pulled back 3.5 points to 53.9 – marking the lowest level in a year. The headline print came in considerably below market expectations which called for a moderate pullback to 56.9.
The vast majority of indicators deteriorated on the month, with new orders (-5.4 to 55.1), business activity (-4.9 to 55.9) and employment (-2.2 to 53.6) recording the biggest declines.
On the other hand, the prices paid sub-index improved 3.6 points to 55.7, indicating that prices increased at a faster rate in July than in the month prior – the second consecutive acceleration.
Despite the pullback, comments from survey contacts remained largely positive. Moreover, nearly all of the non-manufacturing industries surveyed reported growth in July, with Management of Companies, Agriculture, and Forestry, Fishing & Hunting being the only exceptions – all three being very small industries.
Key Implications
The ISM non-manufacturing index followed its manufacturing equivalent and decelerated in July. However, the performance was markedly worse, with the deceleration being more apparent in magnitude and broader across sub-indicators. Overall, while the decline in the headline and among the main sub-indicators is disappointing, the fact that the index remains in expansionary territory and that most industries continue to report growth and remain upbeat, suggest that today’s pullback is less concerning.
The deterioration in the employment sub-index, taken together with an equivalent decline in its manufacturing report and a below-consensus print in yesterday’s ADP employment report suggests some potential softness in tomorrow’s payrolls report and poses a downside risk to our expectation that the U.S. economy added 183k jobs during July.
The silver lining in today’s report was the continued improvement in the prices sub-index. Both the manufacturing and non-manufacturing sub-indices are now back above last year’s levels, after spending two months in the red. Together with a somewhat firmer core PCE index in June, the better numbers suggest that a turnaround in price pressures may be taking place.
