EconoFACTS

January 07, 2020 | 10:26

U.S. Non-Manufacturing Activity .... Steady As She Goes

Economist

Director and Senior Economist
Economics

Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high... (Read more)

Jennifer Lee

Director and Senior Economist
Economics

Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high... (Read more)

There was trepidation ahead of the U.S. non-manufacturing ISM report after its manufacturing cousin hit a 3-year low in the same month...thankfully, there was no need for it. And this is arguably more important as it accounts for 80% of the private sector economy.

The U.S. non-manufacturing ISM improved to an above-expected 55.0 in December, the highest since August. Good news, huh? Indeed. But the details were a little concerning. First of all, the increase was fully supported by a big jump in business activity (aka production) to 57.2, the highest since August, and more supplier delivery delays. Also, employment may have slipped 0.3 pts to a 2-month low of 55.2, but that's not bad and shouldn't change estimates for this Friday's payroll report.

But new orders, which are an indication of what's to come, fell to 54.9, still expanding, mind you, but the lowest reading since September. And, fewer industries reported an increase in new orders in the month (10 from 12 in November). That doesn't look particularly friendly to Q1.

Of the 18 industries in the survey, 11 said they were growing, the fewest since January. They were very mixed....good, bad, some mention of trade uncertainty....which makes it difficult to point to one single culprit.

"Growth remains steady. While late-year pricing-increase proposals were either flat or in the low single digits, most have been mitigated." (Accommodation & Food Services)
"Weather and the holiday season have had an impact on residential new construction sales and production. While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures." (Construction)
"Supply [is] good. Holiday sales below plan." (Information)
"Business activity and growth in our business continues to expand." (Management of Companies & Support Services)
"Our company's production, sales and purchasing [activities] are back to normal. Maintenance, planned and otherwise, is driving the usual necessity for spare parts." (Mining)
"New prospects have improved this month, although continuing uncertainty is causing clients to delay confirmation." (Professional, Scientific & Technical Services)
"Budgets and business accelerating." (Public Administration)
"The shorter-than-normal holiday season tightens sales opportunities; however, initial trends have been favorable." (Retail Trade)
"We are seeing extended lead times for already purchased materials across the board. Suppliers, as well, are warning that they are seeing longer lead times for engineered and manufactured goods." (Utilities)
"Overall business is down from this time last year, but sales have increased over the last month, causing more buys with our suppliers." (Wholesale Trade)

https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm

What should we expect from the coming months? The agreement to Phase 1 of the U.S./China trade deal was made mid-month, and while that came as a big relief, there were questions about when it would be signed (that announcement—January 15—wasn't made until last week), and besides, Phase 2 negotiations could be more difficult. So there's some upside thanks to clarity on China. Plus, looks like it is a go for the USMCA. But now, there is the potential trade war with France and, more broadly, the EU. (Exports of mid-range wines from France have reportedly declined since Airbus-related tariffs were imposed in October.) In any event, new EU Trade Commissioner Phil Hogan will be making his way to Washington for talks with Robert Lighthizer between January 14-16. In other words, yes, there has been improvement on the trade war front with China but another front is opening up across the Atlantic.

Bottom Line: There is upside risk to the fourth quarter, thanks to construction of new homes, steady consumer spending, and fewer imports (the latter is not a good thing). But with the expected pullback in activity given Boeing's plans to suspend production of its 737 Max, trade not completely out of the woods and now, geopolitical risk, that won't be repeated in Q1.

Table 1 - United States — ISM Non-manufacturing Index

(percent reporting)

Source: BMO Economics, Haver Analytics