Non-manufacturing activity in July turns in strong performance, says ISM

The Institute for Supply Management (ISM) reported today that non-manufacturing activity in July had a very solid month.

In its Non-Manufacturing Report on Business, the ISM reported that its index used to measure growth—the NMI—was 60.4 in July (a reading above 50 represents growth), marking a 3.8 percent gain from June. The 56.0 NMI is above the 12-month average of 54.6. Non-manufacturing has seen increases in the last 43 months.

Three of the report’s four key metrics, including the NMI, were up in July. Business Activity/Production shot up 8.7 percent to 60.4, and New Orders were up 6.9 percent at 57.7. Employment dipped 1.5 percent to 53.2.

“With the Business Activity growing at the largest rate since December 20102, it is a question of how much of that was carry over from June or if it is a real indication of what happened in July,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “It is a bit of an open-ended question.”

The significant gains in New Orders and Business Activity/Production, said Nieves, are hard to gauge, even though their respective strong showings was apparent in this report and last week’s ISM Manufacturing Report on Business, too.

Conversely, though, he noted other recent economic reports have not been as optimistic, making it challenging to pinpoint how things will trend out in terms of growth or a lack thereof.

“In my opinion, there might be a bit of a pull back in the coming months and we could be at mid-50s levels or so,” he said.

What’s more, the high level of output could prove to be an anomaly, Nieves, said, citing how the summer months tend to be slower in non-manufacturing than the rest of the year.

Looking at the 1.5 percent dip in Employment, Nieves said that retail performance has dragged that down a bit although it showed growth on the Business Activity and New Orders side.

Supplier Deliveries and Inventories were up 1.0 percent and down 1.0 percent at 52.5 and 53.5, respectively. And Prices were up 7.6 percent to 60.1.

All of the commodities tracked by ISM saw gains in July, with the exception of computers and peripherals.

“These increases have a lot to do with diesel and petroleum and petroleum-based products,” said Nieves. “This sector is reliant on overland trucking and distribution and because of the nature of what it is—in terms of moving tangible goods and services—fuel really plays a role in doing the cost of business and impacts everything.”

Backlog of Orders in July dropped 5.5 percent to 46.5. Nieves said that due to the rise in business activity there was some inventory burn off as well as supplier deliveries slowing down, too.

“Whatever was on the shelf, whether it was tangible goods or services, there was enough there in the system in terms of capacity that there was no growth in backlog,” explained Nieves. “I don’t think that will hold true if these levels of business activity and new orders stay where they are this month. If they stay where they are now, there will have to be backlog growth.”

With the year more than half over, Nieves said it is reasonable to say things are on pace to match the expectations of the ISM’s semiannual forecast made in April, but he cautioned that it is not written in stone either.

Taking that a step further, he noted that the fall months are ultimately the most pivotal in gauging how things will play out.