Imagine being a business owner: you finish your year-end inventory with confidence about the coming year, only to see January orders dip slightly and customers becoming more cautious. Does this signal an approaching economic winter? The latest non-manufacturing report from the Institute for Supply Management (ISM) might offer some clues.
The report indicates that while U.S. non-manufacturing activity cooled slightly at the beginning of 2019, the sector maintained overall growth momentum. The ISM Non-Manufacturing Index (NMI) declined from 58 in December to 56.7 in January, a 1.3% drop. Notably, this marks the 108th consecutive month of expansion, with January's reading just 2% below the 12-month average of 58.7.
The Backbone of Economic Growth
The non-manufacturing sector plays a pivotal role in the U.S. economy, encompassing crucial industries such as transportation, warehousing, healthcare, finance, and insurance. These sectors collectively serve as the engine driving economic expansion, making their performance a vital indicator of overall economic health.
In January, 11 non-manufacturing industries reported growth:
- Transportation and warehousing
- Healthcare and social assistance
- Mining
- Accommodation and food services
- Wholesale trade
- Finance and insurance
- Utilities
- Real estate, rental and leasing
- Construction
- Professional, scientific and technical services
- Public administration
Meanwhile, seven industries contracted:
- Retail trade
- Educational services
- Information
- Agriculture, forestry, fishing and hunting
- Arts, entertainment and recreation
- Corporate management and support services
- Other services
Mixed Signals from Key Indicators
The report presents a nuanced picture through various metrics:
Business activity/production: Decreased 1.5% to 59.7, marking 114 consecutive months of growth.
New orders: Fell 5% to 57.7, continuing a 114-month growth streak.
Employment: Rose 1.2% to 57.8, extending a 59-month expansion.
Supplier deliveries: Remained stable at 51.5 (readings above 50 indicate contraction), continuing a 37-month decline.
Prices: Increased 1.4% to 59.4, continuing a 20-month upward trend.
The employment growth suggests businesses maintain confidence in future prospects, despite some weakening in other indicators.
Government Shutdown Casts Shadow
Several ISM members cited the federal government shutdown as negatively impacting economic activity. A construction sector respondent noted "business is way below expectations as customers are affected by the shutdown." A public administration representative expressed concern about the economic climate, citing shutdown-induced uncertainty and the lack of national strategic direction.
Expert Perspective: Resilient Expansion
Tony Nieves, Chair of the ISM Non-Manufacturing Business Survey Committee, noted that while the 56.7 NMI matches July 2018's low point, it doesn't significantly trail the past year's average.
"The key takeaway is that growth persists," Nieves emphasized. "The business activity reading of 59.7 remains robust, though below December's exceptionally strong 61.2. New orders similarly show healthy expansion."
Looking ahead, Nieves anticipates continued growth, albeit potentially slower than 2018's pace. He suggested that a U.S.-China trade agreement could revive 2018's growth momentum.
Inventory Adjustments Signal Caution
January's inventory measure fell 2.5% to 49, marking the first contraction in 11 months. Respondents attributed this to post-holiday sales and lower-than-expected demand. Nieves explained that companies are drawing down year-end inventories as demand moderates, while growing order backlogs (up 2% to 52.5) suggest ongoing capacity constraints.
Price Pressures Emerge
The prices index rose to 59.4, continuing a 20-month upward trend. Nieves noted that non-manufacturing prices typically follow fuel and oil trends, while food prices (excluding commodities) also influence the sector.
"We're seeing inflation gradually entering the non-manufacturing space," he observed. "While price increases accompany demand growth, current rises appear sharper than expected. However, cost transparency remains high, enabling competitive purchasing."
Cautious Optimism Prevails
The U.S. non-manufacturing sector enters 2019 with cautious optimism. While some indicators show moderation, the overall expansion persists. Businesses should monitor government-related uncertainties and inflationary pressures while remaining agile in their strategies.