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September 6, 2017 Reading Time: 2 minutes

The latest survey of purchasing managers at nonmanufacturing (i.e., services) companies conducted by the Institute for Supply Management suggests overall business conditions improved in August. The results come on the heels of the ISM manufacturing survey released on Friday, September 1, which suggested gains in that sector in August as well.

The composite nonmanufacturing index rose to 55.3 from 53.9 in July. Readings above 50 percent indicate expansion in the nonmanufacturing sector, while results below 50 percent indicate contraction. According to the ISM, “an NMI® above 48.9 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the August NMI® indicates growth for the 97th consecutive month in the overall economy, and indicates expansion in the non-manufacturing sector for the 92nd consecutive month.” Of the 17 industries in the survey, 15 reported expansion in August while just 2 reported contraction. In general, the majority of survey respondents were optimistic.

Among the individual index components, the new-orders index gained two percentage points to 57.1 from 55.1 in July while the production index added 1.6 percentage points to 57.5. Both indexes have been above the neutral 50 level for 97 consecutive months. New export orders, a subset of total new orders, also gained in August, rising to 55.0 from 53.0 in the prior month. The index for backlogs of unfilled orders also expanded in August, gaining 1.5 points to 53.5.

The employment index posted the largest gain for the month among the individual components, rising 2.6 points to 56.2, suggesting payrolls are continuing to expand. The index for prices paid for purchased materials and services by nonmanufacturing companies rose 2.0 points to 57.9, suggesting higher input costs. Higher input costs have the potential to pinch profit margins at nonmanufacturing companies. However, the prices index has not had a sustained period above 55 since 2014. Supplier deliveries, a measure of the time required for the delivery of inputs, lengthened in August, with the index coming in at 50.5. That is a slight improvement from the 51.0 reading in July.

Overall, the August results point to continued expansion for the nonmanufacturing sector with ongoing gains in activity, orders, and hiring. Some price pressures remain, and supplier deliveries are slowing modestly, but the outlook of most respondents remains optimistic. The combined results for the manufacturing and nonmanufacturing surveys support a positive outlook for the economy for the second half of 2017.

Robert Hughes

Bob 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.

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