July non-manufacturing data from ISM points to very high growth levels

July non-manufacturing activity saw a decent jump from June to July, according to the most recent edition of the Non-Manufacturing Report on Business from the Institute of Supply Management (ISM) issued today.

The index ISM uses to measure non-manufacturing growth—known as the NMI—hit 60.3 in July (a level of 50 or higher indicates growth), representing a 4.3 percent increase over June while economic activity in the non-manufacturing sector showed growth for the 66th month in a row and the overall economy grew for the 72nd straight month. The July NMI is 2.9 percent higher than its 12-month average of 60.3.

Including the PMI, each of the report’s four core metrics were up in July compared to June. Business Activity/Production was up 3.4 percent at 64.9 and still growing at a faster rate for 72 straight months. New orders were up 5.5 percent to 63.8 while also growing for the 72nd month in a row, and employment headed up 6.9 percent to 59.6 while still growing for the 17th straight month, as it came in above 50.

What’s more, five metrics in this report set new highs, including: the NMI at its highest; level since January 2008; employment at its highest since August 2005, when it hit 60.2; business activity/production since December 2004 at 65; new orders topped 68.3 from August 2005; and inventories at 57.0 are at its highest level since 68.5 reached in June 2010.

Comments submitted to the report by ISM member respondents were mostly positive. A retail trade respondent noted that business remains strong and the outlook for the rest of the year is favorable, and a utilities respondent noted that “new business continues.”

“People are somewhat flabbergasted by the strength of the numbers in this report,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “The answer will be whether or not this growth is sustainable and how it will trend out over the next several months. There has not been a month like this since the report’s inception.”

The best explanation Nieves said he has heard for such strong output in July is that while there have been so many hiccups and bumps in the road during the ongoing economic recovery, whether it is oil prices or geopolitical concerns, or other signs of volatility, things are relatively good at the moment, when looking at things like low gas prices, and overall prices (up 0.7 percent to 53.7 in the report) are also good, coupled with many companies seeing strong earnings, too.

But he also noted that while things appear solid now, they are still not at pre-recession levels, coupled with the fact that this most recent batch of data represents only one month.

“One month of rapid growth does not make a trend,” he said. “If August and September even come close to this level of growth, tighten your seatbelt. But my gut tells me that growth is not likely sustainable at this level month over month. I think we will see growth but I don’t think it will carry over at this rate, with some sort of leveling off likely.”

Supplier deliveries in July came in at 53.0 (a reading over 50 indicates slower deliveries) compared to 51.5 in June, and backlog of orders grew for the second month in a row, up 3.5 percent to 54.0, along with the aforementioned inventories up 2.0 percent to 57.0.

Nieves said these things are all related in that inventories grew, with deliveries slowing to meet that growth, employment increased to meet the resources needed to handle this growth, and new orders, and business activity were all in sync with each other to meet these levels.

“There is not anything surprising with one index popping out more than another in this report,” said Nieves.