The Institute for Supply Management’s (ISM) non-manufacturing index continued to ease off from its January cycle high, falling by 0.7 points to 58.8 in March, after declining 0.4 points in the month prior. The headline print came in a hair below expectations.
The underlying details of the report were mixed, with business activity (-2.2 to 60.6) and new orders (-5.3 to 59.5) giving back roughly half of the robust gains made in the prior two months.
The employment sub-index, which has seen large swings since the start of the year, improved on the month, rising 1.6 points to 56.6. The supplier deliveries index also rose 3 points to 58.5 – surpassing the previous cycle high in the aftermath of hurricanes Harvey and Irma, and rising to the highest level since 2005.
Among the remaining subcomponents, prices (61.5) and the backlog of orders (56.5) gained half a point apiece, with the latter extending the gains to three months.
The vast majority of industries reported growth on the month, with educational services and information being the only exceptions. In addition, comments from survey respondents remained upbeat with respect to business conditions.
Key Implications
The slight declines in the ISM non-manufacturing index over the past two months are certainly nothing to write home about. Nonetheless, the most important point to highlight here is the fact that the index remains near historical highs, which indicates that sectoral activity continues to expand at a very healthy pace. This narrative is further supported by broadly positive survey comments and the fact that the vast majority of industries continue to expand.
Another important element worth highlighting from today’s survey is the supplier deliveries sub-index, which is now at the highest level since 2005 – indicating slower deliveries. Given that supply chain disruptions caused by hurricanes Harvey and Irma have largely eased off by now, the recent uptick in the sub-index appears to be related to stronger demand – a narrative corroborated by upbeat business activity and new orders on a trend basis.
Although concerns on the trade front have centered on the potential impact on the U.S. manufacturing sector, the non-manufacturing sector is also likely to face challenges. For instance, sectors such as transportation & warehousing and wholesale, would be indirectly affected by disruptions to manufacturing activity. At the same time, the agriculture and livestock sector would be directly impacted if China’s proposed tariffs on American food products come into effect. All told, while the outlook for non-manufacturing activity remains upbeat, the proposed tariffs and retaliatory threats from trade partners pose a material downside risk to our economic outlook more broadly.
