ISM non-manufacturing data is flat but up for the 20th consecutive month

The Institute for Supply Management’s (ISM) Non-Manufacturing Report on Business in July fared better than its manufacturing counterpart.

The ISM’s index for measuring the sector’s overall health—known as the NMI—was 52.7 in July, a 0.6 percent decline from June. A reading above 50 represents growth. And even with the sequential decline in the NMI the report showed growth in the non-manufacturing sector for the 20th consecutive month.

The July ISM Manufacturing Report on Business, which was released earlier this week, saw a decrease of 4.4 percent to 50.9.

Three of the NMI’s four core metrics were down in July compared to June. Business Activity/Production was up 2.7 percent at 56.1. New Orders were off 1.9 percent at 51.7, and Employment fell 1.6 percent to 52.5.

“The rate of growth shown in this report is slowing, but it is still occurring at a faster pace than manufacturing,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “This report depicts a more accurate picture of what is going on in the economy based on the fact that there are varied companies and industries that make up non-manufacturing. It makes up more than 80 percent of economic activity.”

While Business Activity/Production was up nearly 3 percent, Nieves pointed out that this activity could have been spurred by orders from more than a month ago. And given the nature of supply chain management and specific businesses, Nieves said businesses may get new orders at different times, which, in turn, affects cycle times for business activity.

And months like July and August tend to be slowed down due to seasonality, but Nieves said August is shaping up to be a pivotal month and serve as the lead-in to a closer view of economic activity for the remainder of the year, when business activity tends to wind back up.

Even though Employment was down it is still showing growth, which Nieves explained is the result of selective hiring in certain sectors.

“These are calculated hirings in sync with what certain companies are bringing back into the workforce,” said Nieves. “It is a timing thing with Business Activity and New Orders and we need to see how it will play out in the coming months.”

Another thing to keep an eye on in the coming months, said Nieves, is consumer confidence.

He cited an improving retail sector as a sign of improving consumer confidence, while retail sales have been largely up and down for months. And if Employment can return to the mid-50s, he said it would clearly go a long way towards augmenting consumer confidence, too.

“The consumer has definitely loosened the purse strings a little bit,” explained Nieves. “People are out there shopping, and certain retailers are doing very well.

The key to meaningful growth or recovery, said Nieves, is growth in employment numbers. But more capital investment is needed, too, he said. The ISM’s Semiannual Forecast exemplified this, with 2011 non-manufacturing capital investment expected to increase by only 1.4 percent. This is due in part to consumer confidence not needing where it needs to be and subsequently slowing down employment growth.