ISM non-manufacturing data finishes Q1 in a good spot

While I was on the road earlier this week at the MODEX show in Atlanta, the Institute for Supply Management (ISM) issued the March edition of its Non-Manufacturing Report on Business. And given some of the shaky economic metrics floating around out there, like Q1 GDP and flattish retail sales, it is fair to say that ISM’s data was, in some ways, a breath of fresh air.

First, off the reports key metric used to measure growth, the NMI, hit 54.5 (a reading of 50 or higher indicates growth), which was 1.1 percent above February, while growing now for 80 consecutive months, coupled with economic activity in the non-manufacturing sector growing for 74 months through March. The current NMI is 1.9 percent below the 12-month average of 56.4, which means it is in good company to be sure.

As for the report’s other key metrics, Business activity/production shined at 59.8, topping February by 2 percent, with growth intact for 80 months straight, and new orders saw a 1.2 percent gain to 56.7 at 1.2 percent, while also seeing growth for 80 months.  Employment was also solid, heading up 0.6 percent to 49.7. While ISM likes to see new orders on par with business/activity production, the difference this month was slight and not reflective of a meaningful economic slowdown in the non-manufacturing sector.

I did my monthly interview on the report’s data and key takeaways with Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, and he was bullish on the March data.

“What we hear about the economy is usually a bit of a mixed bag that has been on the negative side,” he said. “While things may be stalled and there is some uncertainty out there, overall, the report still shows slow and steady growth maintaining itself throughout and, things appear to be better year over year. Things lined up well in March, coming off of a 12-month lull in the NMI in February, but March came back from contraction and things look good.”

A good amount of feedback from ISM member respondents in the report was solid.
A transportation and warehousing respondent said that while there was no new business, existing business climbed 5 percent month-over-month, especially for his company’s e-commerce fulfillment business, with subsequent pricing flat as productivity improvements are creating more capacity with less incremental cost.

“Transportation and warehousing is always a big segment for this sector,” noted Nieves. “There is always a reliance on that intermediary in the supply chain for services-type industries in non-manufacturing.”

With such good overall March numbers, I asked Nieves how they are essentially reconciled with declining GDP output, which is currently estimated at around 0.6 percent annual growth.

Nieves’ response was insightful, explaining that going back over time the NMI and GDP have essentially mirrored each other and tend to move in sync like dance partners.

“If you look at that over the course of a full year on an annualized basis as opposed to month-to-month or quarter-to-quarter, that is usually the case, he said. “In this case, a longer view is needed.”

As Nieves has said on more than one occasion, “one month does not set trends.” That could not be more true when it comes to assessing data like this, but it does portend optimism for growth throughout the non-manufacturing sector for the remainder of 2016 if we continue to see a few more solid months like we did in March.