U.S. ISM nonmanufacturing index falls in February, but remains solid

The U.S. ISM nonmanufacturing index dropped in the month of February. The index fell 0.4 points to 59.5, after rising by 3.9 points in the previous month. The headline print came in above expected, with market consensus expecting a slightly larger fall of 0.9 points.

Movements among the main subcomponents came in mixed. Business activity and new orders continued to build on last month’s impressive rises, extending the two-month advance by 5 and 10.3 points respectively to 62.8 and 64.8. The level of the new orders in fact marked a new cyclical peak, rising to the highest level since 2005.

Meanwhile, the employment sub-index dropped 6.6 points and settled around mid-2017 levels. In the meantime, the supplier deliveries sub-index remained stable for the third straight month at 55.5 points. The performance among the remaining indicators was widely positive, with the backlog of orders, new export orders and inventories all rebounding. The prices paid sub-index pulled back a bit but stayed elevated at 61 points, implying continued price pressures.

Comments from survey contacts maintained a positive tilt with respect to business conditions and the economic outlook. In the meantime, the vast majority of industries reported growth on the month, with arts, entertainment & recreation and accommodation & food services being the only two exceptions.

The report released today implies  that after a brief lull at the end of last year, the U.S. nonmanufacturing sector is resuming a healthier level of activity at the beginning of 2018, with the index largely holding onto last month’s gain. Wide strength among a few of the main sub-indicators, especially business activity and new orders – with the latter reaching a new cyclical peak – along with a widely positive outlook among survey contacts, add further credence to this narrative, noted TD Economics.

“Current levels of the ISM nonmanufacturing index, alongside its manufacturing cousin, suggest that the U.S. economy should be growing near 2 percent (ann.) during the quarter. However, the hard data has been coming in weaker, with our latest nowcast suggesting the pace of growth is closer to 1.6 percent. Nonetheless, we believe that residual seasonality may be behind some of the weakness, with the pace of growth likely to accelerate in subsequent quarters”, added TD Economics.

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