Non-manufacturing sees mild decline in September but still growing

Unlike its manufacturing counterpart, which has had two straight difficult months, the Non-Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM), remained on the right side of growth in September.

The index ISM uses to measure non-manufacturing growth—known as the NMI—was 52.6 in September (a reading of 50 or higher indicates growth is occurring), which is a 3.8% decrease compared to August. While still growing for the 116th consecutive month, the September reading is the lowest one over the last 12 months, with the NMI 4.2% below the 12-month average of 56.8.

ISM reported that 13 non-manufacturing sectors grew in September, including: Utilities; Retail Trade; Construction; Mining; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Public Administration; Management of Companies & Support Services; Finance & Insurance; Transportation & Warehousing; Information; Health Care & Social Assistance; and Professional, Scientific & Technical Services. The four industries reporting a decrease were: Educational Services; Other Services; Real Estate, Rental & Leasing; and Wholesale Trade.

The majority of the report’s key metrics declined in September, including:

business activity/production down 6.3% to 55.2, still growing for the 122nd month in a row; new orders fell 6.6% to 53.7, also up for the 122nd month in a row employment slipped 2.7% to 50.4, growing for the 67th consecutive month; supplier deliveries slowed to 51.0 from 50.5 in August (a reading above 50 indicates contraction); prices rose 1.8% to 60.0 up for the 28th month in a row; and inventories dropped 2% to 53.0, up for the second straight month

Themes in the report submitted by ISM member respondents focused on various topics, including business conditions, tariffs, and the economy.

An accommodation & food Services respondent noted that tariffs are adding uncertainty to short-term pricing on certain commodities, but suppliers are finding alternate solutions and also said that the bigger impacts appear to be on demand side, which is driving short-term favorability in certain domestic markets.  And “an other services” respondent explained that while Chinese tariffs are understandable, they are impacting supply chain decisions.

“We are actively pursuing alternate sources for our China-based production,” the respondent said. “At this point, we have not passed on tariff costs to our customers, but we are evaluating all options.”

In an interview, Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, explained that the sequential decline in the report’s numbers from August to September does not portend a gloom and doom scenario.

“People need to remember this is measured on a month-to-month basis, especially with September coming off of such a strong August,” he said. “Some of the [higher] numbers we saw in August were just not sustainable and were ones that are not typically seen in August. There is some pullback here, but it is one month and not a trend. There was some cooling off in August before we saw the August numbers, and now, with the September numbers, we are back to reality…and we still had growth.”

Nieves said that the fourth quarter will be pivotal for both the non-manufacturing and manufacturing sectors, with the latter dealing with two months of contraction and heading into a period of the year, which is usually associated with strong growth levels.

“We really need to see what materializes with both sectors in October,” he said. “A lot of it has to do with trade uncertainties.”

Non-manufacturing employment, he said, will require a watchful eye in the coming months, as there was a bit of a pullback from August to September, with part of that having to do with available labor resources, coupled with employment being one of the few controllable, or variable, expenses on the service industries side, due to it being such a labor-intensive sector. And when that is coupled with the available labor pool, there is still low unemployment, with wage pressure also creeping in over the last few months, Nieves said.  

“There is no cause for alarm just yet, we still have growth,” said Nieves. “We will see how it pans out over the next few months.”

Imports and exports: September non-manufacturing imports were off 1.5%, down to 49.0, and new export orders, at 52.0, headed up 1.5%.

Nieves attributed the decline in imports to some forward buying done before certain tariffs were implemented, as well as the fiscal year ending on September 30, which impacted some companies, and was a timing issue.

Looking ahead, Nieves said there are a few things to keep an eye on, with the caveat that it is still too early to consider the prospects of a recession.

“In every recessionary period, we have had some sort of bubble,” he said. “There was the dot-com bubble, the subprime bubble coupled with the inverted yield curve and a decline in manufacturing that led to a recession,” he said. “But there is not a bubble right now. We don’t have anything that is really there. There are some headwinds, but we don’t have anything other than perhaps some geopolitical concerns like the trade war, but that stuff can be remedied a lot sooner maybe than people even think. I expect to see non-manufacturing growth continue for non-manufacturing in the fourth quarter, and I hope it happens in manufacturing. October will be a key indicator month for manufacturing. For non-manufacturing, retail season will kick in, and consumer confidence will probably head up a bit. We still have low unemployment, and that is a big factor for this sector.”