January non-manufacturing output sees mild dip but remains on right side of growth, says ISM

The index ISM uses to measure non-manufacturing growth—known as the NMI–dropped 1.3% to 56.7 in January compared to December’s 58.

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The Institute for Supply Management (ISM) reported today its Non-Manufacturing Report on Business that non-manufacturing activity grew to start 2019, albeit at a slightly slower level than it did to close 2018.

The index ISM uses to measure non-manufacturing growth—known as the NMI–dropped 1.3% to 56.7 in January compared to December’s 58. This marks the 108th consecutive month of growth for the NMI, with the January NMI off 2% compared to the 12-month average of 58.7. 

ISM reported that 11 non-manufacturing sectors reported growth in January, including Transportation & Warehousing; Health Care & Social Assistance; Mining; Accommodation & Food Services; Wholesale Trade; Finance & Insurance; Utilities; Real Estate, Rental & Leasing; Construction; Professional, Scientific & Technical Services; and Public Administration. Seven non-manufacturing industries reported contraction in January in the following order: Retail Trade; Educational Services; Information; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Management of Companies & Support Services; and Other Services.

The majority of the report’s key metrics, including the NMI, were mostly down in January, including:

  • business activity/production down 1.5% to 59.7, but still growing for the 114th month in a row;
  • new orders fell 5% to 57.7, growing for the 114th consecutive month;
  • employment was up 1.2% to 57.8, growing for the 59th consecutive month;
  • supplier deliveries were down flat at 51.5 (a reading above 50 indicates contraction), falling for the 37th consecutive month; and
  • prices increased 1.4% to 59.4, up for the 20th consecutive month

A fair amount of comments from ISM member respondents in the report touched upon the recently concluded Federal Government shutdown. A construction respondent said that business slowed well below expectations as our customers deal with the effects of economic situations exacerbated by the government shutdown. A public administration said: “apprehension regarding overall economic conditions due to uncertainly of the partial government shutdown, its effect on business climate and lack of national strategic direction. Economic activity remains strong locally; however, there is concern that this may change quickly due to uncertainty and reports of slowing economic indicators."

In an interview, Tony Nieves, chair of the ISM's Non-Manufacturing Business Survey Committee, said that even though the 56.7 NMI reading matches the 2018 low from July, it is not much below where the NMI has resided over the last year. 

"The key thing is that there is still growth," he said. "The business activity reading, at 59.7, is still high and coming off of 61.2 in December, which was very strong. The same goes for new orders as well, which is still showing good growth. 

Looking ahead, Nieves said it is reasonable to expect continued growth in the coming months, atlhough it may not be as strong as it was in 2018, based on industry commentary and feedback from its members. 

"I don't think we will see as much of a cooling off like there was in January but more steady and incremental growth," he said. "I do believe that if the U.S.-China reaches some type of settlement that we will see a replication of what we had in 2018."

January inventories, at 49, dropped 2.5%, contracting for the first time in 11 months. ISM reported that 29% of its members indicated they do not have inventories or do not measure them. Some reasons for the decline in January inventories noted by respondents in the report were attributed to holiday volume causing an increase last month and sales were lower than forecast. 

With some waning in demand, Nieves explained that companies wanted to deplete some inventories that were built-up from year end, as well as from year-end holidays.

"They are depleting that, but yet you are still seeing the backlog grow [January backlog of orders rose 2% to 52.5, up for the 13th consecutive month], which tells you that even though trucking conditions have improved there are still some capacity constraints," he said. "And the employment reading where it is looks like it is paying catch up to the lack of human resources with these respective companies in the past. It also tells you there is some confidence going forward to maybe staff up for the levels of business they are going to have."

Prices saw a 1.4% increase in January to 59.4, growing for the 20th consecutive month. Nieves said that the direction of non-manufacturing prices often follows the lead of fuel and oil prices and are how most food prices, outside of food commodities, are followed in the non-manufacturing sector. 

"We always have volatilty for food commodities, with weather playing an important part, and we have had inflation creeping into non-manufacturing over the last several months," he said. "And as demand increases, prices will go up, just not at the sharp increases we have seen. We have such transparency into costs that even consumers can competitively shop like the best buyer out there with RFID tags on items in stores and get price comparisons right off of a smart phone."

About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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