ISM Non Manufacturing Survey: Further Strength Despite Supply Chain Worries

July 5, 2018
Bottom Line: Purchasing managers in non-manufacturing sectors are increasingly reporting more concern about transportation shortages and costs. That said, business remains robust, accelerating slightly in June as new orders grew. Employment decelerated slightly, back to April levels and confirming today’s moderate gains in the ADP report. This employment index has had strong correlation with the total nonfarm payrolls ex-manufacturing growth in the past and suggests a very modest downside risk to tomorrow's 195k consensus. The ISM Non-Manufacturing Index ROSE by 0.5 points in June to 59.1%, compared with market expectations for a larger decline to 58.3%. The June reading was slightly higher than its average level over the past 12 months, and the current level of the index indicates that the economy is growing moderately.
  • New Orders rose by 2.7 points to 63.2%.
  • Order Backlogs declined modestly but Inventories increased modestly.
  • Employment fell by 0.5 points to 53.6% , indicating that upcoming employment report will likely be lower than last month's print.
  • Prices fell by 3.6 points to 60.7%.
Quotes from the Survey:
  • “Tariffs, freight [issues] and labor shortages continue to have an inflationary influence on costs.” (Construction)
  • ldquo;Positive outlook — business activity on the uptick.” (Finance & Insurance)
  • “Shortage of IV solutions and drugs continues to be an issue.” (Health Care & Social Assistance)
  • “Crude prices are causing concern, as it is a driver in newsprint inks. Tariffs on paper and aluminum are causing apprehension about future pricing. Suppliers are posturing and threatening price increases, and we are doing our best to reject increases.” (Information)
  • “Trade tariffs are creating price uncertainty.” (Management of Companies & Support Services)
  • “Domestically, we are still experiencing a shortage of transportation providers that is getting worse each month when retiring drivers or drivers moving into other opportunities are not being replaced. Internationally, there is a shortage of flat racks [that] has caused late shipments. The tariffs on steel and aluminum have also had some negative effects on our supply of material, but we have applied for exemptions.”(Other Services)
  • “Oil price stabilization has led to increased hiring in some sectors of the industry, as well as a small increase in major capital projects for offshore drilling companies. Oil-field services hiring continues to be strong, as does hiring and capital spending in the petrochemical and downstream sectors of the industry.” (Professional, Scientific & Technical Services)
  • “Commodity prices [are] increasing due to demand and transportation costs.” (Public Administration)
  • “Sales have remained strong and are continuing to increase. Currently, we are on pace for a top-line record. The bottom line is more flat, as we have been fighting commodity cost increases and exchange-rate variances throughout the first half of 2018.” (Retail Trade)
  • “Wire sales improve as contractors ramp up with the rise in copper. We’re seeing ongoing price increases in nearly all commodities due to higher freight expenses by manufacturers and shortage of truck drivers.” (Wholesale Trade)