Non-Manufacturing ISM furthers the upside economic data surprises

Note: This post was first published on Patreon on 5 Jun 2018

As I mentioned in the last post here, bullish manufacturing data don’t necessarily translate. We’ve seen a divergence in services and manufacturing employment of late. And that’s a bit worrying since the services numbers are the weak ones. That’s where most of the jobs are created in the US economy.

So we need to see what the services numbers say. And the services ISM report came out this morning. They were really good numbers — above expectations. Consensus estimates were for a reading of 57.9% survey respondents indicating business was expanding. The actual reading was 58.6%. This is up significantly from last month’s 56.8% reading.

The worrying bit is the inflation. Look at these two sample responses:

  • “Since the last report, our foil lid supplier stated that the tariff on aluminum has caused supply interruptions and higher costs. A price increase was instituted by the supplier.” (Agriculture, Forestry, Fishing & Hunting)
  • “Material prices have been difficult to predict this year, and suppliers have struggled to hold prices for any extended period on quotes, specifically on lumber and lumber-related products. The instability has proven frustrating, but a larger problem is that we are starting to see longer lead times in many of the same areas that could start impacting timelines if they continue to get worse as we get into the main building season.” (Construction)

Just as with manufacturing, it was prices that led all sub-indices. Look at the data below.

ISM Non-Manufacturing May 2018

This report shows the US economy in a good way. In terms of things the Fed watches, both employment and inflation look good. If anything, this report confirms fears that the headline rate will dip below the Fed’s target and cause inflation to accelerate. While I ma not concerned about this outcome, the Fed is. And it will react accordingly.

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