From the Institute for Supply Management (bolds and paragraph breaks added by me):
Economic activity in the non-manufacturing sector grew in June for the 77th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.
… The NMI® registered 56.5 percent in June, 3.6 percentage points higher than the May reading of 52.9 percent. This represents continued growth in the non-manufacturing sector at a faster rate.
The Non-Manufacturing Business Activity Index increased to 59.5 percent, 4.4 percentage points higher than the May reading of 55.1 percent, reflecting growth for the 83rd consecutive month, at a faster rate in June. The New Orders Index registered 59.9 percent, 5.7 percentage points higher than the reading of 54.2 percent in May.
The Employment Index grew 3 percentage points in June after one month of contraction to 52.7 percent from the May reading of 49.7 percent. The Prices Index decreased 0.1 percentage point from the May reading of 55.6 percent to 55.5 percent, indicating prices increased in June for the third consecutive month.
According to the NMI®, 15 non-manufacturing industries reported growth in June. Respondents’ comments are mostly positive about business conditions and the economy. Overall, the report reflects a strong rebound from the ‘cooling-off’ of the previous month for the non-manufacturing sector.
The 15 non-manufacturing industries reporting growth in June — listed in order — are: Mining; Arts, Entertainment & Recreation; Management of Companies & Support Services; Retail Trade; Health Care & Social Assistance; Utilities; Real Estate, Rental & Leasing; Accommodation & Food Services; Transportation & Warehousing; Wholesale Trade; Information; Public Administration; Agriculture, Forestry, Fishing & Hunting; Construction; and Finance & Insurance. The three industries reporting contraction in June are: Educational Services; Professional, Scientific & Technical Services; and Other Services.
Several problems here:
- Backlog of orders, one of the three key GDP drivers (Business Activity and New Orders are the others) went from breakeven to contraction (47.5 percent).
- The most positive element of the report is Inventories, which is at 62.5 percent, up from 60.0 in May. That’s supposed to mean inventories are “too high,” or I should say “way too high.” In a normal world, which we’re not in, plentiful inventories would be comforting because buyers don’t need to worry about suppliers not having stock. That’s not the problem here. The problem is that the low-interest rate environment has made holding inventories artificially cheap, and has led to an artificially high inventory build-up. Stuff can only sit there for so long before some of it becomes not salable, for any one of a number of reasons, mostly obsolescence (e.g., replacement by new models or new technology, etc.).
- The comments aren’t as enthusiastic as the topside number.
- The Markit PMI index, at 51.4 percent, barely rose, and its authors are asking, “Rebound? What rebound?”
As noted in the past in connection with the Manufacturing Index but apparently equally applicable to Non-Manufacturing, ISM appears to be getting survey results from firms doing well and not getting them from those which aren’t. The big difference between Markit and ISM would appear to confirm that.