June edition of ISM non-manufacturing report on business continues on growth path

The Institute of Supply Management (ISM) said today in its Non-Manufacturing Report on Business that non-manufacturing business sectors again were on the right side of growth for the month of June.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 56.0 in June, which edged out May by 0.3 percent (a level of 50 or higher indicates growth), while coming in 1.2 percent under the 12-month average of 56.0. And economic activity in the non-manufacturing sector has grown for the last 65 months, while the overall economy has grown for the last 71 months, according to ISM.

Including the PMI, three of the report’s four core metrics were up in June compared to May. Business Activity/Production was up 2 percent at 61 and still growing at a faster rate for 71 straight months. New orders were up 0.3 percent to 57.9 while also growing for the 71st month in a row, and employment was down 2.6 percent to 52.7 while still growing for the 16h straight month, as it came in above 50.

Fifteen non-manufacturing sectors reported growth in June, with only three-mining, other services, and construction-reporting contraction.

While comments submitted to the report by ISM member respondents were mostly positive, there was some underlying concern about avian influenza, or the bird flu, was cited repeatedly, with an agriculture, forestry, fishing and hunting respondent saying it “has significantly impacted business,” and an arts, entertainment, and recreation respondent noting that while it has been a strong summer in the industry, there are supply chain challenges due to the avian flu. A retail respondent expressed that the overall business outlook remains strong with performance in its specific retail market being very good.

In an interview, Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, explained that employment was truly the only thing holding the NMI back from further growth from May to June.

“When you look at it compared to manufacturing side [which was up 3.8 percent in June to 55.7], it looks like employment might be lagging, but at the end of the day the non-manufacturing sector still had robust employment, with this possibly being more of a cycle-time thing. We are in the summer months right now and outside of retail there tends to be not as much retail employment activity compared to other months. Overall, we expect employment levels to head up a little bit in the coming months, and I expect to see this overall sector increase at a faster clip in the future hopefully.”

The reasons for this, he explained, stem from strong new orders and business activity, with unemployment potentially lagging for another month or so before seeing material NMI gains.

Looking at other key metrics, supplier deliveries (under 50 notes growth) were up 1.5 percent or slowing at a faster rate, and inventories rose 4.0 percent to 55.0. Prices dropped 2.9 percent to 53.0 and remained above 50 for the fourth month in a row, and backlog of orders increased 2.0 percent to 50.5.

Nieves said that the inventory levels matched up with what has been occurring on the business activity/production side, coupled with new order growth, too, noting that it does not represent a significant stop and is basically just matching up with current business levels.

When asked to describe the overall state of non-manufacturing, Nieves again cited jobs, noting “as employment goes, this is how this sector goes, adding that, given the labor-intensive nature of non-manufacturing, employment growth should come with further business activity.