October 3, 2019

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index declined 6.3 points in September to 55.2 after having surged upwards by 8.4 points in August to 61,5.  It has been very volatile as economic news produces rather dramatic monthly changes.  The February level of 64.7 was the highest level for this index since January 2004.  While volatile on a monthly basis, this index has averaged about 60.0 and generally been in a range from 55.0 to 65.0 for the past several years.      In September 13 service-sector  industries  reported expansion versus only 4 industries that reported a decline. At its September level the non-manufacturing index equates to GDP growth of 1.4%.

Typically, large changes in the overall index are led by orders which, in this case, fell 6.6 points in September to 53.7 after having jumped 6.2 points in August to 60.3.   At 53.7 this series points to solid growth in services in the months ahead which is, of course, the all important holiday sales season.

The ISM non-manufacturing index for employment fell 2.7 points in September to 50.4 after having declined 3.1 points in August to 53.1.  The last time this employment gauge was this weak was in early 2016 when payroll employment gains averaged between 150-160.  Comments from respondents include: “Number of new employees starting to level off” and “Tightening workforce is leading to a more competitive market for qualified potential employees.”  Jobs growth should continue in upcoming months at a pace of about 160 thousand per month.

Finally,  the price component rose 1.8 points in September to 60.0 after having risen 1.7 points in August to 58.2.   Fifteen non-manufacturing industries reported an increase in prices paid during the month.  At its current level of 60.0 prices are now rising at a much faster pace.

The manufacturing and non-manufacturing sectors of the economy are going in totally opposite directions.  The manufacturing sector is getting hit hard by the tariffs and Trump’s inconsistent tweets.   But the much larger non-manufacturing (or service) sector is still cruising at a moderate pace.

In short, this was not a great report for the service side of the economy but, given its volatility, it is not a horrible report either.  Some comments from respondents are instructive:

“Tariffs are adding uncertainty to short-term pricing on certain commodities, but suppliers are finding alternate solutions.”

“Demand has been variable — up one month, down the next.”

“We are very busy right now [and] expect to be so for the next 12 months. We are still very shorthanded with qualified labor.”

“As employee cost [wages] are increasing in this better economy, it is getting harder to fight price increases on goods and services.”

“Costs are going up, from labor to chemicals to metals.”

“While Chinese tariffs are understandable, they are impacting our supply chain decisions. We are actively pursuing alternate sources for our China-based production. At this point, we have not passed on tariff costs to our customers, but we are evaluating all options.”

Stephen Slifer

NumberNomics

Charleston, SC