U.S. ISM non-manufacturing index rebounds in August, some volatility likely in coming months

The Institute for Supply Management’s non-manufacturing index recovered in August. The index rose 1.4 points to 55.3 in the month after it had dropped by 3.5 points to 56 in July. However, the headline print was slightly below consensus expectations of a rise to 55.6.

Gains were widespread with most sub-indicators rising on the month. Among the most notable were rebounds seen in employment index that rose 2.6 to 56.2, business activity index that rose to 57.5 and new orders index that was up 2 points to 57.1. The backlog of orders and new export orders also rebounded by 1.5 and 2 points to 53.5 and 55 respectively.

The prices paid sub-index rose for the third straight month by 2.2 to 57.9. The recent rebounds have reversed the huge 8.4 deterioration that was seen in May, bringing the sub-index slightly above April’s level.

Among the remaining indicators, imports index saw a slight drop of 1 point to 50.5. In the meantime, indices for inventories and inventory sentiment recorded more notable falls to 53.5 and to 61, respectively, remaining near their 12-month average. Almost all of the non-manufacturing industries surveyed reported growth in the month, with Agriculture, Forestry, Fishing & Hunting, and Transportation & Warehousing being the only exception. Meanwhile, survey contacts’ comments continued to be largely optimistic.

The rebound of the ISM non-manufacturing index implies that the softness seen in the earlier month was temporary. The recent acceleration brought the headline index into expansionary territory. Furthermore, gains in the subcomponents were comparatively widespread, with recoveries in business activity, new orders and employment being especially encouraging. While these pressures are yet to be reflected in CPI and the PCE price index, the trend is expected to still provide some comfort to the Fed as it meets to discuss monetary policy in two weeks’ time, noted TD Economics in a research report. The results released today do not seem to be affected by Hurricane Harvey.

“Nonetheless, we expect these to come through in next month's survey with both non-manufacturing as well as manufacturing activity being affected. As such, some volatility should be expected in the months ahead”, added TD Economics.

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