Last month, after the Non-Manufacturing ISM® Report On Business® indicated that momentum in the U.S. services sector could be stalling, Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, preached caution, saying that one set of numbers doesn’t necessarily indicate a trend.
Nieves, Chair of the Institute for Supply Management® Non-Manufacturing Business Survey Committee, said then that a services-sector summer slowdown is not atypical, adding that the economy remains robust. August brought a rebound, as the NMI® data released on Thursday included a composite-index reading of 58.5, a 2.8-percentage point gain from July.
Non-Manufacturing @ISM® Report On Business®: Led by faster growth in business activity and new orders, U.S. services sector recovers from mini-slump with a strong August. NMI® at 58.5%, a 2.8-percentage point increase from previous month. https://t.co/CdyFxIm08U #ISMROB #economy— Institute for Supply Management (@ism) September 6, 2018
The August NMI® is slightly above the 58.3 average for the last 12 months, and Nieves says he hopes that’s a sign that the non-manufacturing sector has regained the stability it showed during the first half of the year. “It was a nice uptick after the ‘cooling-off’ period in July,” he says. “It a nice indicator that the growth is more sustainable and not (prone to) upward or downward spikes.”
The Business Activity Index registered 60.7 percent, an increase of 4.2 percentage points from the previous month. “What I liked about that, coupled with a strong New Orders Index reading from the manufacturing sector — even though manufacturing is a smaller component of contribution to gross domestic product — both are a good leading indicator of how things are projecting with the economy,” Nieves says.
Much of the discussion on Thursday was related to tariffs, more so than after any NMI® release this year. While non-manufacturing companies generally don’t purchase such goods as steel or aluminum, those materials go through the supply chain and often end up as finished goods in the services sector. While tariffs turbulence hasn’t impacted the sector overall, Nieves says, some companies have been affected, and many more are dealing with the uncertainty.
.@ISM® Report On Business® survey respondent in retail trade: “Since we are a services business, tariffs have little impact (but) we do harbor future concerns about general cost of goods from overseas and the effects on consumer pricing.” https://t.co/Y5vIQ5EE7p #ISMROB #economy— Dan Zeiger (@ZeigerDan) September 6, 2018
“Government tariffs are negatively impacting production and recycling sales,” wrote a survey respondent in information. “Pulp costs have gone up, and that has directly impacted paper for our newspaper production and copy paper. A 10-percent tariff has been placed on aluminum, (which) is used to make production plates. Those used plates are put on the recycling market, which China has put a tariff on. These dynamics have a significant impact on newspaper margins.”
Nieves says that services-sector companies that deal with tariffs-related commodities have increased intake costs, and the issue is how much can be passed on to consumers. For many companies, their success at passing on costs will be revealed in their third-quarter earnings reports. However, for the non-manufacturing sector as a whole, Nieves says, “As long as the economy remains as robust as it is now, and the discretionary spend and consumer confidence is there, it's not going to stifle growth.”
The Report On Business® roundup:
Bloomberg: U.S. Service Industries Grew in August by More Than Forecast. “The reading on the main index matched the most optimistic analyst forecasts, signaling that demand for services is buoying U.S. companies and the economy. The gain across all four index components — business activity, new orders, employment and supplier deliveries — follows another ISM report this week showing the group’s factory gauge advanced to a 14-year high.”
CNBC: ISM Non-Manufacturing Index Jumps Back to 58.5 in August. “That's better than expectations,” analyst Rick Santelli said. “The really nice part is, in the rear-view mirror, last look was 55.7 (in July), the weakest since last August. So, it really bounced back quite nicely.”
Kitco News: Gold Prices Edge Down as ISM Non-Manufacturing NMI Beats Expectations: “In an initial reaction to the latest ISM Non-Manufacturing index, gold declined, with December Comex gold futures last seen trading at (US)$1,209.60, up 0.69 percent on the day. Earlier on Thursday, the yellow metal received a boost from softer U.S. dollar.”
MarketWatch: Most U.S. Companies Grow at Sizzling Pace in August Despite Tariffs, ISM Survey Finds. “Many executives complain U.S. tariffs or the threat of tariffs have led to higher prices for raw materials. They also say finding suitably skilled workers is another growing problem. All in all, though, most companies are growing rapidly and managing those problems well enough to keep business growing strong. The U.S. economy itself is also expanding rapidly and could post its fastest growth in 2018 in 13 years.”
#ISM non-manufacturing beats at 58.8 vs 56.8 forecast. But what the market cares most about, #Employment index, hit 56.7 against 56.1 in July. Other ISM non-mfg indices also strong/above forecast overall #fortherecord ^KO— Ken Odeluga (@Ken_CityIndex) September 6, 2018
The Wall Street Journal: Service-Sector Businesses Are Getting Increasingly Jittery About Tariffs. “The report indicates service industries, such as health care and retail, which make up the bulk of economic output, are still in healthy shape heading into the end of the year. Still, the Trump administration’s recent imposition of tariffs on steel and aluminium products—and retaliatory tariffs from foreign countries—are impacting multiple service subsectors directly and making firm owners in others afraid of an imminent downstream effect.”
In case you missed Tuesday’s ROB Roundup on the release of the Manufacturing ISM® Report On Business®, you can read it here. For the most up-to-date content on the PMI® and NMI® reports, use #ISMROB on Twitter.