The Institute for Supply Management’s (ISM) non-manufacturing index surged by 4.5 points to 59.8 in September – the highest reading since August 2005. The headline print surprised to the upside, with market expectations set on a slight uptick to 55.5.
September marked the second consecutive month of broad-based gains among the sub-indices, with pullbacks recorded only in inventories and inventory sentiment.
Notable gains were recorded in business activity (+3.8 to 61.3), new orders (+5.9 to 63) and prices paid (+8.4 to 66.3), with the latter indicating that prices increased for the fourth consecutive month to the highest level in more than five years.
The acceleration in activity and demand slowed supplier deliveries in September with the sub-index increasing by 7.5 to 58 (a reading above 50 indicates slower deliveries). Comments from industry contacts pointed to weather conditions and the inability of suppliers to respond to increased demand as reasons for the slowdown.
Comments from survey contacts remained largely positive and nearly all industries reported growth on the month, with Arts, Entertainment & Recreation, and Mining being the only exceptions.
Key Implications
The ISM non-manufacturing index surprised significantly to the upside in September, in line with its manufacturing cousin. Just as in the case of the manufacturing index, some of the September gains appear to be driven by supply chain disruptions and rebuilding efforts in the aftermath of Hurricane Harvey and Irma.
Improvements in the employment and prices paid sub-indices are very encouraging. The former, taken together with an uptick in its manufacturing equivalent, point to some upside risk regarding expectations for a subdued payrolls report this Friday – given the likely Irma impacts. Meanwhile, the surge in the prices paid sub-index, while likely temporarily boosted by hurricane disruptions, nonetheless provides some comfort with regards to the inflation outlook.
While this is definitely a solid report, we are reluctant to put too much emphasis on the surprisingly upbeat headline print given the transitory forces at play. But, while the current headline may be overstated in light of the disruptions, we believe that underlying momentum remains solid given the details of the report and breadth of improvement.
