March non-manufacturing data shows growth despite coronavirus

Even though its core composite, known as the NMI, showed growth in March, the most recent edition of the Non-Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM), made it clear that the coronavirus, or COVID-19, is having a negative impact on the non-manufacturing sector.

The March NMI came in at 52.5 in March, down 4.8% from February’s 57.3 reading (a reading of 50 or higher indicates growth is occurring), which marks the highest reading over the last year. The NMI headed up for the 122nd consecutive month, and the March NMI is 2.5% below the 12-month average of 55.0 and is the lowest reading over that span. 

ISM reported that nine non-manufacturing sectors reported growth in March, including: Health Care & Social Assistance; Real Estate, Rental & Leasing; Public Administration; Utilities; Finance & Insurance; Construction; Management of Companies & Support Services; Wholesale Trade; and Information. The seven industries reporting a decrease in March — listed in order — are: Arts, Entertainment & Recreation; Transportation & Warehousing; Professional, Scientific & Technical Services; Mining; Other Services; Retail Trade; and Educational Services.

The report’s key metrics saw declines in March, with:

• business activity/production down 9.8% to 48.0, snapping a stretch of 127 months of growth and posting its lowest reading going back to July 2009’s 47.2;
• new orders dropped 10.2% to 52.9, up for the 128th month in a row but growing at a slower rate;
• employment dropped by 8.6% to 47.0, halting a run of 72 consecutive months of growth;
• supplier deliveries slowed at a faster rate for the tenth month in a row, from 52.4 in February to 62.1 in March;
• prices were off 0.8% to 50.0, increasing tor the 34th consecutive month; and
• inventories dropped 12.4% to 41.5, slowing after growing in February

Comments submitted by ISM members primarily focused on the challenges coronavirus have created for non-manufacturing, or service-based, sectors.

A Health Care & Social Assistance Significant respondent pointed to shortages of personal protective equipment (PPE), chemical reagents, test swabs and other basic medical supplies persist, adding that extreme sourcing measures are required to procure necessary supplies for basic operations, as well as distributor allocations continuing across the board.  And a real estate, rental, and leasing respondent stated that the coronavirus is affecting every aspect of business.

In an interview, Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, explained that the biggest takeaway of this report is that non-manufacturing activity remained in expansion mode in March.

“The NMI is derived equally from business activity/production, new orders, employment, and supplier deliveries, which has been modeled historically over the years to figure out which would map closest to GDP,” he said. “Normally, regardless of what is currently transpiring, supplier deliveries correlate most closely to supply and demand. With less supply and demand up, you would say things are going fairly well….but the March NMI reading is an anomaly, in that it is not normal for how slow the deliveries are going now at 62.1. That is the slowest we have had deliveries and the highest reading since August 1997, at 71.5.”

Through that lens, Nieves explained that supplier deliveries account for 25% of the NMI, and it is essentially “propping up” the cumulative reading.

Looking ahead, Nieves said it is reasonable to expect conditions to continue to slide before seeing an improvement.

“When looking at the top five [non-manufacturing] industries and what their percentage represents for GDP, three of them exemplify growth, and you can look at two of the three and immediately know why,” he said. “Health Care & Social Assistance is one and the other is Government. The demand on government we know right now is extreme. The third one is Real Estate, Rental & Leasing, as things are still going there. We are not seeing people buy residential properties, but there are still things going on in the rental and leasing areas. The percentage of those three sectors to non-manufacturing GDP is in excess of 30%, with the other sectors dropping down to small single-digit percentages.”

As the ISM preps for its semiannual report to be issued in mid-May, Nieves said that will include data from the current shelter-in-place policies currently being enacted in most states.

“Things are not going to look pretty in that report,” he said. “We will ask respondents how they think the latter half of the year is going to look, and I don’t think anyone has a crystal ball for that, especially when business is shut down.”   

Given the current situation, due to coronavirus, Nieces said it was a surprise that new orders came in above 50 in March, with the expectation it will come closer to the baseline of 50 or contract in April.

“Part of that is replenishment, as people really got ahead of themselves emptying shelves, coupled with PPE (personal protective equipment) items that are in dire need and in short supply,” he said. “People still need to consume things.”