The Institute for Supply Management’s (ISM) non-manufacturing index dropped 2.7 points to 57.4 in November, marking a much sharper drop than the 1.1 point expected by markets as the effects of Hurricanes Harvey and Irma faded. Having said that, the index remains in healthy expansionary territory.
All of the main subcomponents declined, with new orders (-4.1 to 58.7) seeing the largest loss, followed by employment (-2.2 to 55.3), prices paid (-2.0 to 60.7) and business activity (-0.8 to 61.4). These moves partially reversed the hurricane-induced gains that materialized in the previous two months.
The supplier deliveries index was 4.0 points lower at 54.0 as longer lead times due to hurricane-related supply chain disruptions in the previous month faded, bringing the index closer to normal.
New export orders pulled back by 3.0 points but at 57.0 remains healthy.
The prices paid sub-index extended last month’s loss, with the continued pull-back stemming from the dissipation of the temporary hurricane effects. Still, at 60.7, the index remains well above average levels seen over the past twelve months and is one of the best prints since 2012.
Comments from survey contacts remain positive, with some reporting a levelling off in business as the holiday season approaches. Additionally, construction industry contacts noted labor shortages in the West. Sixteen industries reported an expansion in November, and only one – agriculture, forestry, fishing & hunting – reported a contraction.
Key Implications
A pullback in the headline index was anticipated as the recent uptick resulting from hurricane-related supply chains disruptions faded. However, the headline index still remains at a healthy level, matching June’s print. Going forward, we expect the robustly expanding U.S. economy and a rebounding energy sector will shore up performance in the non-manufacturing sector in the quarters ahead. Additionally, Hurricanes Harvey and Irma have highlighted the tightness of the labor market with shortages in the construction sector reported as preventing expansion.
In addition to existing strong demand fundamentals, the Republican tax reform plan should provide an added boost to profits, and may bolster business investment while benefitting producers whose margins are squeezed by rising input costs, including those in the construction and transportation industries, amongst others. All told, this report confirms that the services side of the economy will continue to support strong growth in the quarters ahead.
