ISM Non-Manufacturing Index trends down in August

Coming on the heels of a 0.5 percent gain from June to July, the Institute of Supply Management’s Non-Manufacturing Report on Business displayed the ongoing signs of a fragile economy with a decline from July to August.

The ISM’s index for measuring the sector’s overall health—known as the NMI—was 51.5 percent in August, a 2.8 percent decrease from July. Like the ISM’s manufacturing index, a reading above 50 percent or higher represents growth. August marks the eighth consecutive month the NMI is more than 50 percent.

The report’s three key metrics each stumbled in August, with: the Business Activity/Production Index at 54.4 percent for a 3.0 decline from August; New Orders at 52.4 percent down 4.3 percent, and Employment at 48.2 percent, which is 2.7 percent below July.

“When you look at these indexes, you need to keep in mind Business Activity and Production is still showing growth, but it is at a slower rate,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “Employment [for the NMI] is contracting, which differs from the federal government’s employment report. That could be nothing more than a timing issue, as it relates to the NMI’s respective respondents.”

In the past, employment numbers have typically dragged the NMI down, and that was the case again in August, said Nieves. Had employment not dropped 2.7 percent it would have been in line with July’s 54.3 percent NMI.

This report follows the ISM’s Manufacturing Business report which showed growth, with a 1.1 percent uptick to 56.3 percent in August, coupled with relatively low consumer confidence reflected in sluggish back-to-school retail sales.

Nieves pointed out that while the ISM’s NMI and Manufacturing reports are mutually exclusive, there is a correlation between them.

“Manufacturing has always been more of a leading indicator report of what is happening in the economy,” he said. “It led into the last recession prior to the most recent one and came out of that recession in 2003 and led into the current one as well. But more than 80 percent of the economy is non manufacturing-related.”

Looking at this report—aside from the contrast in NMI and federal government employment numbers—Nieves said it is reflective of what is happening in the economy today which could be viewed as one of slow growth or a jobless recovery. And while the economy is currently, not in a double-dip recession, overall conditions are fragile, according to Nieves.

The NMI’s Prices index rose 7.6 percent to 60.3 percent, following a 1.1 percent decrease to 52.7 from June to July. While sustained pricing power is not apparent, Nieves cited a survey respondent whom said “due to general economic conditions, we are finding more aggressive pricing and deals to win business in the competitive marketplace.”

What is impacting pricing the most in the non-manufacturing sector, according to Nieves, are fuel and energy prices.

“Any spike in diesel or retail gasoline or fuel in general impacts pricing,” said Nieves. “Even though non-manufacturing is made up of a lot of services, there is still wholesale in there and other types of industries that rely on trucking and distribution to disparate locations that require fuel and energy.”

NMI Imports at 50.5 percent were up 2.5 percent compared to July, and New Export Orders at 46.5 percent were down 5.5 percent.