Non-manufacturing activity is solid in October, reports ISM

The October edition of the Non-Manufacturing Report on Business from the Institute for Supply Management (ISM) continued where September left off: in solid growth mode.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 59.1 in October (a level of 50 or higher indicates growth), up 2.2 percent over September’s 56.9 and down 1.2 percent compared to July’s 60.3, which is its highest reading since January 2008. The October NMI is 1.6 percent higher than the 12-month average of 57.5. The non-manufacturing sector has grown for 69 straight months, while the over all economy has grown for 75 straight months.

Each of the report’s four key metrics, including the NMI, grew in September. Business Activity/Production was up 2.8 percent to 63.0 and showing growth for the 75th month at a faster rate, and new orders were up 5.3 percent to 62.0. Employment inched up 0.9 percent to 59.2, showing growth at a faster rate for the 20th month in a row.

Like last month, comments submitted by ISM member respondents for the report were mixed to a degree, but more positive on balance, which is in some ways reflective of the current economic outlook and also contingent on specific industry, too.

A retail trade respondent said that overall business and volume have been very consistent and strong over the past month, and a professional, scientific, and technical services respondent observed that the economic outlook appears consistent but clients are suddenly very conservative with discretionary spending. A wholesale trade respondent said that his business continues to grow at an unprecedented rate, explaining it is a direct correlation to the price of gas giving the consumer more expendable income.

“When you look across the board, we see strong gains in new orders, and business/activity production, with employment in the right direction, too,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “The only thing holding the NMI from being higher is supplier deliveries at 52.0 [down 0.5 percent from September,” said Nieves. “It is a strong report, with non-manufacturing contributing more than 85 percent to GDP, and it can be attributed to a lot of confidence out there in the form of consumer confidence, as well as commercially, as well as gains in discretionary spending, too, with fuel still low.”

Inventories in October were up 1.5 percent to 52.5 and showed growth at a faster rate for the seventh straight month, while backlog of orders stayed the same at 54.5 while still growing for the fifth straight month. Prices showed a slight 0.7 percent increase to 49.1.

Nieves said that the report is stronger than what he originally envisioned although not by a wide margin. The reason, he said, is that there has been such a strong rate of growth going back the last few months, even with a bit of cooling off in September, there were questions about how sustainable non-manufacturing’s strength was, given the uneven tempo of the global economy and whether or not that strength could be maintained going forward.

“Right now, there are strong indications that it will end up being a solid fourth quarter,” he said. “Only time will tell if it is sustainable or not. Even if things slow down a bit or go sideways, it still is a great rate of growth. Things are set up for a nice finish but after the holiday build up in October and November, there will likely be a little bit of a lull closer to the end of December.”