Non-Manufacturing Growth Decelerates Slightly in July; Initial Claims Remain Low

By Robert Hughes

Following Tuesday’s report from the Institute for Supply Management suggesting that the manufacturing sector expanded at a slightly slower pace in July, yesterday’s report from the ISM suggests a similar performance for the non-manufacturing sector.

The ISM’s non-manufacturing index pulled back to a reading of 53.9 from 57.4 in June. For this index, 50 is neutral, with readings above 50 suggesting expansion and readings below 50 suggesting contraction. Typically, the NMI ranges between 50 and 60, with dips below 50 during recessions. Historically, readings above 48.9 have suggested expansion of the overall economy. The July result is the 91st consecutive reading above 50.

Among the key components of the NMI, the business-activity index (equivalent to the production index in the manufacturing report) was 55.9 in July, down from 60.8 in June. For the month of July, 14 industries reported growth while 3 reported contraction.

The new-orders index came in at 55.1, down from 60.5 in June. July was the 96th month of readings above 50. The new-export-orders index, a separate index that measures only orders for export, has been above 50 for six consecutive months, but fell to 53.0 in July from 55.0 in June.

The employment index fell to 53.6 in July, down from 55.8 in June. The slightly lower but still-favorable reading suggests employment in non-manufacturing likely increased in July. The Bureau of Labor Statistics will be releasing its own employment report for July tomorrow, Friday, August 4.

The one component that raised concern in the manufacturing report was the prices index. It rose 7 points to a reading of 62 in July. July was the 17th month in a row that the prices index has been above 50. This result suggests manufacturers are experiencing materials-costs increases. The price index for non-manufacturing also rose in July, but to a less-threatening 55.7, a 3.6-point rise from 52.1 in June. The prices index has been below 60 for more than two years, a favorable performance relative to the 2004–12 period, when the index was often above 60, broke 70 several times, and hit a record 83.5 in September 2005.

Supplier deliveries, a measure of delivery times for suppliers to non-manufacturers, came in at 51.0, down from 52.5 in June. It suggests suppliers are falling farther behind in delivering supplies to non-manufacturers, but the slippage has slowed a bit from the prior month.

Today’s report from the Institute of Supply Management suggests the non-manufacturing sector continued to grow in July, though the pace eased a bit. That performance is in line with the report for the manufacturing sector and other recent data that point to ongoing expansion for the overall economy, though the pace of overall growth remains moderate by historical measures.

The latest weekly claims for unemployment insurance fell 5,000 to 240,000 for the week ending July 29. The four-week average, calculated to help reduce volatility, fell 2,500 to 241,750. A level of initial claims below 300,000 is considered consistent with a tight labor market, and claims have been below that level for 124 weeks. Claims are 0.167 percent of payroll employment, the lowest on record. The strong labor market continues to be the cornerstone of the economic expansion and is complementing strong consumer spending and upbeat consumer attitudes regarding the current economy.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.