The Institute for Supply Management’s (ISM) non-manufacturing index declined for the third consecutive month in April, falling 2 points to 56.8. The headline print came in below expectations, which called for a more moderate decline of only 0.8 points. Over the past three months, the index has given back four-fifths of the 3.9-point surge in January, with the headline now being slightly ahead of the December level.
Three of the main subcomponents fell on the month. Leading the declines were supplier deliveries (-4 points to 54.5), which pulled back from a cycle high, and employment (-3 points to 53.6). The latter has shed some 8 points after peaking to nearly 62 points in January. Business activity also pulled back slightly (-1.5), but remained elevated at 59.1.
New orders were the only main subcomponent to advance on the month (+0.5 points to 60), a move which was also accompanied by a surge in export orders (+3.5 points to 61.5 – the highest point since April of last year).
Among the remaining details, prices continued to perk up for the second consecutive month (+0.3 points to 61.8) .
All 18 non-manufacturing industries reported growth on the month, with respondents remaining positive about business conditions and the economy overall. But many respondents also expressed concern regarding the uncertainty related to tariffs, with one commentating “The international trade situation appears to be shifting on a minute-by-minute basis, which has folks nervous”.
Key Implications
Non-manufacturing activity has indeed cooled off from the cyclical peak reached at the start of the year. The recent results appear to have been impacted by uncertainty surrounding trade policy – a theme evident in today’s survey comments. This could continue to be a factor in the near-term as we approach several important deadlines related to trade action.
The recent pullbacks have been somewhat measured, averaging just 1-point a month, with the April headline print still marking one of the better showings of the post-recession period. This indicates that the non-manufacturing sector is still expanding at a healthy pace, with broad strength among two important subcomponents on a trend basis – business activity and new orders – further corroborating this narrative. However, the continued decline in the employment sub-index may point to some downside risk for near-term payrolls gains.
Capacity constraints in light of healthy demand and rising input costs are continuing to put upward pressure on prices. Together with the most recent inflation metrics, today’s results are still in line with gradual monetary policy tightening, with two more hikes projected for the year.
