Home Economic Trends ISM Surveys: The Calm Before the Potential Storms – Robert Hughes (03/05/2020)

ISM Surveys: The Calm Before the Potential Storms – Robert Hughes (03/05/2020)

The Institute for Supply Management’s nonmanufacturing composite index rose to a reading of 57.3 in February from 55.5 in the prior month (see top chart). For this index, 50 is neutral, with readings above 50 suggesting expansion for the sector and readings below 50 suggesting contraction. Historically, readings above 48.5 have suggested expansion of the overall economy. The February result is the 121st consecutive month above 50 suggesting expansion for the services sector, and the 127th month above 48.5 suggesting expansion for the overall economy. This stands in sharp contrast to the ISM Manufacturing Purchasing Managers’ Index which remained close to 50 (see top chart again).

Among the key components of the nonmanufacturing index, the business-activity index (comparable to the production index in the ISM manufacturing report) was 57.8 in February, down from 60.9 in January but still a solid result. For February, 13 industries in the nonmanufacturing survey reported growth while three reported contraction.

The nonmanufacturing new-orders index jumped to 63.1, up from 56.2 in January (see bottom chart). February was the 127th month with readings above 50. The positive reading suggests diverging paths for services versus manufacturing where the new-orders index dipped back below neutral for the sixth time in the last seven months.

The new-export-orders index, a separate index that measures only orders for export, was 55.6 in February, the best result since April 2019. Seven industries reported growth in export orders while eight reported declines.

The nonmanufacturing employment index increased to 55.6 in February from 53.1 in January. The improved reading suggests services-sector employment likely rose for the month. The jobs report from the Bureau of Labor Statistics is due to be released on Friday March 6. Consensus is for a gain of 175,000 new non-farm jobs with 160,000 coming from the private sector.  A separate estimate from Automatic Data Processing (ADP), the payroll processing company, puts private-sector payroll gains at 183,000 for the month of February.

Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 52.4, up from 51.7 in the prior month. It suggests suppliers are falling further behind in delivering supplies to nonmanufacturers and the slippage has accelerated a bit from the prior month.

Today’s report from the Institute of Supply Management suggests that growth accelerated in the nonmanufacturing sector in February. The results stand in sharp contrast to the weak results of the ISM manufacturing survey. The services sector of the economy continues to be the main source of growth while manufacturing industries struggle.

Many respondents to both surveys mentioned the COVID-19 outbreak as a major concern. The situation surrounding the COVID-19 outbreak is changing rapidly.  Efforts to contain the virus as well as reactions by people are likely to have a very significant impact on economic activity. Extreme caution is warranted.