May non-manufacturing activity remains on growth path, reports ISM

Even though it was down slightly on a sequential basis, non-manufacturing activity remained solid in May, according to the most recent edition of the Institute for Supply Management’s (ISM) Non-Manufacturing Report on Business. 

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 56.9 in May, down 0.6% from April’s 57.5, which was its highest level since February 2015, while still growing for the 89th consecutive month. The May NMI is 1% higher than the 12-month average of 55.9.

Including the PMI, most of the report’s core metrics were off in May.

Business activity/production dipped 1.7% to 60.7, growing for the 94th consecutive month, while new orders were down 5.5% to 57.7 and still growing for the 94th straight month. Employment jumped up 6.4% to 57.8, showing growth for the 39th consecutive month. ISM said that 17 of 18 sectors reported growth in May.

And ISM member comments submitted for the report were largely positive. A finance and insurance respondent said that business is progressing steadily, with no real effort to affect annual goals and efforts. A professional, scientific, and technical services respondent noted how the business outlook continues to be steady and meeting original projects, while there have been some ups and downs in successive months.

“When you have 17 sectors reporting growth, that is a good thing, coupled with manufacturing being strong, too,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee. “You cannot look at things and say ‘some industries are doing well, and some are not, with some isolation here and there.’ Over all, it seems like things are just humming along.”

Addressing the drop in new orders, Nieves said that it came off a very high reading of 63.2 in April, which was not a sustainable growth rate, stressing that the May number remains very strong.

The strong gain in employment, on the other hand, appears to be inconsistent with the federal government jobs report issued last week, which fell short of expectations. In the non-manufacturing sector 15 sectors reported employment growth, though, which Nieves said is a positive.  

But even with the employment growth seen in May, Nieves said that there remains a shortfall of candidates in the labor pool to add jobs, with capacity for adding jobs not being reached. 

Looking at the state of non-manufacturing through the first five months of 2017, Nieves said that the numbers are better than what was expected and anticipated.

“Things are definitely on track and maybe a little bit ahead of the curve,” he said. “From what the respondents are saying even with all of the uncertainty and transition, they are still optimistic about where things are going provided there are no major bumps in the road, due to any types of catastrophic event of some sort.”

Some other key metrics in the report included:

• inventories up 1.5% to 54;
• backlog of orders up 3.5% to 53.5; and
• prices down 8.4% to 49.2

Nieves said the pricing decline only represents one month of contraction, leaving a need to “see how things trend out” because there has not been a high level of pricing power out there, due to a high level of competition in the non-manufacturing sector.

“This is especially true in the retail arena, with a lot of physical stores competing with online distribution and other things,” he noted. “People have so much information at their fingertips now for price comparisons and research. The consumer is now so much more educated, whether it be on the commercial or residential or retail said.”