US: ISM Non-Mfg Index

Thu May 03 09:00:00 CDT 2018

Consensus Consensus Range Actual Previous
Composite Index - Level 58.4 57.3 to 59.3 56.8 58.8

All 18 non-manufacturing industries in the April ISM report composite growth, leading another very strong month where strength perhaps is understated by the 56.8 headline which falls under Econoday's low estimate. Holding down the composite headline is less pressure on delivery times which however remain extended in continuing evidence of shipping pressures and shortages. New orders remain exceptionally strong, at 60.0, with export orders even stronger at 61.5 (strength echoed in today's jump in service exports in the international trade report).

ISM's sample includes not only service industries but mining, which has been very strong and is also the leading industry in April, and also construction, which despite possible snags due to metal tariffs, is near the top. Though immediate effects are uncertain, tariffs were a hot topic for respondents who expressed their concerns over related business disruptions and the risk of unexpected outcomes.

Higher input costs are certainly one risk of tariffs with this reading up 3 tenths to a very elevated 61.8. Other readings in today's report include a 3 point dip in employment to 53.6 which still points to strength but won't be raising expectations for tomorrow's employment report. Employment and deliveries aside, April's report once again highlights ISM non-manufacturing as one of the strongest small-sample surveys on the calendar.

Market Consensus Before Announcement
The ISM non-manufacturing index is expected to hold at a very strong rate of growth, at a consensus 58.4 in April vs 58.8 in March. Delivery times have been lengthening and input costs going up, both indicative of unsustainably strong growth for ISM's sample.

The Institute For Supply Management surveys more than 375 firms from numerous sectors across the United States for its non-manufacturing index. This index covers services, construction, mining, agriculture, forestry, and fishing and hunting. The non-manufacturing composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the non-manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation. A reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries. However, slower deliveries are a plus for the economy -- indicating demand is up and vendors are not able to fill orders as quickly.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM non-manufacturing survey's composite index, investors will know what the economic backdrop is for the various markets. The non-manufacturing composite index has four equally weighted components: business activity, new orders, employment, and supplier deliveries. The ISM did not begin publishing the composite index until the release for January 2008. Prior to 2008, markets focused on the business activity index. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this relatively new report goes back to 1997.