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ISM Non-Manufacturing: Still Growing But Pace Moderates

November 4, 2020

Bottom Line: The services sector of the economy rebounded for the fifth straight month in October, but growth decelerated modestly more than expected. New order growth slowed, and net hiring was barely positive. Inventories increased modestly as sentiment about the trajectory of inventories deteriorated. While there are plenty of reasons for concern in this report, it is important to note that most of the sub-components still point to modest to moderate growth.

The ISM Non-Manufacturing Index FELL by 1.2 points in October to 56.6%, compared with market expectations for a decline to 57.5%.

The October reading was modestly higher than its average level over the past 12 months. That said, the current level of the index indicates that the economy is growing moderately.

  • New Orders fell by -2.7 points to 58.8%.
  • Order Backlogs increased moderately and Inventories increased modestly.
  • Employment fell by 1.7 points to 50.1% , indicating that the upcoming employment report will likely be lower than last month's print.
  • Prices increased by 4.9 points to 63.9%.
Sectors
The 16 services industries reporting growth in October — listed in order — are: Transportation & Warehousing; Construction; Accommodation & Food Services; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Educational Services; Finance & Insurance; Management of Companies & Support Services; Wholesale Trade; Mining; Professional, Scientific & Technical Services; Utilities; Retail Trade; Real Estate, Rental & Leasing; Information; and Other Services. The two industries reporting a decrease in October are: Arts, Entertainment & Recreation; and Public Administration.

Quotes from the Survey:
  • “Business has improved, but greatly reliant on COVID-19-related restrictions. Supplier’s inventories and lead times are longer and spotty with outages due to keeping lead times lean as a cash flow measure, but putting consistent supply at risk.” (Accommodation & Food Services
  • “Interesting business cycle: Labor is still in short supply, and work orders are picking up.” (Construction)
  • “Challenges to maintain safety and prevent the spread of COVID-19 has meant changes in the way activities are carried out. Purchases of personal protective equipment [PPE] and facilities equipment along with modifications to buildings and walkways has led to higher spending in some areas.” (Educational Services)
  • “Given COVID-19, the adjustments we have made across the company has allowed us to reach previous employment levels, and those furloughed are back to work. Everyone is careful to wear the required PPE and keep distancing. We have added additional cleaning staff between shifts to upgrade sanitation.” (Finance & Insurance)
  • “The new normal COVID-19 environment is causing uncertainty, but we’ve seen an increase in business that is close to pre-COVID-19 volumes for procedures.” (Health Care & Social Assistance)
  • “While the economy is getting better, there is still very much uncertainty about the future. We are putting capital expenditures on hold untilwe gain additional confidence and certainty.” (Information)
  • “We are remaining cautiously positive and resuming normal business operations.” (Management of Companies & Support Services)
  • “Encouraging signs continue for an improved fourth quarter.” (Professional, Scientific & Technical Services)
  • “We continue to be cautiously optimistic that the rebound in business that began in July continues to sustain.” (Retail Trade)
  • “Business continues to gain as people are travelling and businesses are opening up to consumers.” (Wholesale Trade)

Article by Contingent Macro Advisors