ISM issues positive report on NMI growth
March 04, 2011 - SCMR Editorial
The Institute for Supply Management reported that its Non-Manufacturing Report on Business showed positive growth for the 15th straight month.
The ISM’s index for measuring the sector’s overall health—known at the NMI—was 59.7 in January, a 2.3 percent increase from December. Like the ISM’s Manufacturing Report on Business, a reading above 50 represents growth.
Three of the NMI’s four core metrics were up in January. The Business Activity/Production Index at 66.9 was up 2.3 percentage points. New Orders at 64.4 were down 0.5 percentage points, and Employment at 55.6 was up 1.1 percentage points.
“In the past, we have seen some head fakes with this data, when it comes to assessing the economy, and I am always a little bit cautious,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “It was good to see another strong month, and it appears that the recovery is sustainable, with slow, incremental growth, but there is still cautious optimism.”
With the Business Activity/Production Index and New Orders both in the mid-60’s range, Nieves said an increase in the Employment numbers would be welcomed, explaining that the Employment numbers are slowly increasing, especially when considering where the baseline was established coming out of a slow, recessionary period. An Employment figure in the upper 50’s range would be welcome, but Nieves said that may not occur for some time, as it will be a slow and steady crawl.
February Inventories came in at 55.5 for 6.5 percent gain over January, which was down 3.5 percent compared to January.
“When I see inventories starting to build up a little stronger and supplier deliveries [down 1.5 percent to 52.0] slowing more, they are still not slowing to the point where demand is exceeding supply and that there was a lack of capacity and, therefore, there would have to be more employment, that would be the perfect scenario,” said Nieves.
When looking at Inventories, Nieves explained there is typically some sort of post-holiday lull, and many companies were cognizant of that and reluctant to build up inventory levels. And for the past three years most companies have had a close eye on cash flow and cash liquidity to keep cash flow free and not tie up a lot of capital by working to reduce inventories and get levels as close as possible to a just-in-time level.
This cautiousness is what has held back inventory growth, he explained.
“With high demand coming out of the gate in 2011, companies were caught short, because they did not have a substantial inventory to deal with the business, which is why I think we hit that contraction,” said Nieves. “Now, inventories are being built up some, and I would like to see them be built up a little more. Once you start building inventories to meet future—or current—demand, it is going to prompt some other indices to be impacted such as employment…especially in a very labor-intensive area like non-manufacturing.”
Looking at Supplier Deliveries, which have seen fluctuation in the low 50’s in recent months, Nieves said these current levels are healthy in relation to the current business levels and the ability to satisfy business requirements, with that number moving into the upper 50s in a perfect scenario.
While the economic recovery appears to be in solid shape, things like high oil prices could quickly change things. And with the PMI’s Prices index up 1.2 percent to 73.3, Nieves said that the price per barrel of oil is a moving target on a daily basis.
“In non-manufacturing, with over-the-road trucking and remote locations, fuel is big,” said Nieves. “I don’t think it is as much pricing power to increase margins, where it appears to be more along the lines of maintaining margins and passing through those increases. We have to be very careful, because if demand starts to be very strong and there are inflationary pressures, coupled with increases in energy-related commodities, we need to look out for how that may impact respective industries and companies.”
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