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First Cut: ISM Non-Manufacturing Index recovers its footing in February after shutdown stumble in January

The ISM Non-Manufacturing Index rose to 59.7 in February after cooling to 56.7 in January in what was clearly related to the partial federal government shutdown when many government contractors and subcontractors put off activity due to nonpayment of existing agreements and delays in closing new contracts. However, that is in the past and survey respondents’ comments reflect widespread concerns about future tariff policy and its impact on prices and supplies, but on the whole activity seems healthy and sustained for the service sector.

Compared to the factory sector, the ISM numbers point to less volatility in activity for the service sector.

Three of four components of the index were higher in February from January. There were sharp increases for business activity (64.7 versus 59.7) and new orders (65.2 versus 57.7) and a modest widening for supplier delivery times (53.5 versus 51.5). Employment dipped (55.2 versus 57.8) and was its lowest since 53.6 in June 2018. Hiring in the service sector has probably started to level off, in part due to a lack of available workers with a good skills match for current openings, and in part because the hectic pace of expansion in the past year is not expected to repeat in 2019.

Although not a component as is the case for the ISM Manufacturing Index, inventories nipped above neutral again (51.0 versus 49.0).

Prices paid were down to 54.4 in February after 59.4 in January, and fell for a fourth month in a row. The level was also the lowest since 53.0 in May 2017. Prices for energy commodities had more-or-less plateaued in February after January, ending the slide in the closing months of 2018. It is probable that the pass-through of price increases for other commodities that followed on the imposition of tariffs in mid-2018 have now moved through the data. If fresh tariffs are implemented in the coming months, that could change.

The index for export orders got a nice increase in February from January (55.0 from 50.5), but excluding the January reading was the lowest since 55.0 in August 2017. Orders from abroad have declined, and some of the February increase could be bringing some orders forward in anticipation of higher tariffs in March or April. Imports fell below neutral (48.5 versus  52.0) since 48.5 in May 2015.

 

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