ISM October non-manufacturing report is nearly identical to September, still growing

Like its companion report focused on manufacturing, growth remained the primary theme for The Institute for Supply Management (ISM)’s Non-Manufacturing Report on Business, which showed growth in non-manufacturing sector grew for the 23rd consecutive month.

The ISM’s index for measuring the sector’s overall health—known as the NMI—was 52.9 in October, down 0.1 percent from September. A reading above 50 represents growth.

The September ISM Manufacturing Report on Business, which was also released this week, was down 0.8 percent but still grew at 50.8.

Of the NMI’s four core metrics, one was up in October compared to September. Business Activity/Production was down 3.3 percent at 53.8. New Orders were down 4.1 percent at 52.4, and Employment rose 4.6 percent to 48.7.

“Sometimes people look at this report and see the PMI down and assume things are bad, but that is not the case,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “What people sometimes fail to realize is that each month the baseline changes and growth is still occurring month over month. We had a fast rate of growth for Business Activity and New Orders last month (September), and it today’s economy it is tough to sustain those levels of growth month-over-month.”

While non-manufacturing business activity dipped down a bit and September New Orders at a relatively high level of 56.5—prior to the 4.1 percent dip in October—typically transposes into increased business activity if not the following month, then months thereafter, Nieves said it is key to see how things trend out and what the impact is on a trend relative to three months versus a single month.

That said, Nieves explained the current level for Business Activity of 53.8 remains solid, as it remains in line with what was forecasted by ISM respondents last spring, when they called for slow incremental growth month-over-month, which would carry through 2011—with a slight uptick during holiday shopping season—and possibly into 2012.

“This is right on track where we thought it would be,” he said. “We would like to see it in the mid-50’s range, but that is not reality. There are too many other factors involved, and it is related to things like employment, consumer confidence, and all the global turmoil occurring, which is pulling back on spending patterns. We are not seeing as much capital reinvestment and companies loosening the purse strings. It is all integrated. We could very well finish the year up at these current levels.”

Looking at inventories dropping 6.0 percent to 45.5, Nieves said to October decline was due in part to a good but not great September, with some subsequent drop off to be expected. And the continued emphasis on cash flow and managing inventories has been ongoing inventory management-related themes for several months, according to Nieves.

On the Prices side, October dropped 4.8 percent to 57.1 for non-manufacturing. Nieves said this is directly attributed to the prices of fuel, which has a direct effect on the pricing index, coupled with demand being down slightly, resulting in a volume drop off.

“Competition as been reduced with some companies going away, but those that remain are highly competitive and have to compete harder for business,” said Nieves.