U.S.: ISM Non Manufacturing Slumps in June

• The ISM non manufacturing index tumbled to 48.2 in June from 51.7 in May and was well below consensus expectations. This is a cyclical low, if one ignores the dubious January data.
• The employment index was especially concerning with a drop to 43.8 in June from 48.7 in May.
• Prices paid by non manufacturing businesses rocketed to 84.5 from 77.0 in May, suggesting that the confluence of price pressures is having an impact.

The U.S. non manufacturing ISM index fell to 48.2 in June, which was a cyclical low, though not an all-time low. The composite index is now below the 6-month average of 49.2 and most of the subcomponents pared back or indicated some pressure in June. The most notable was the slump in the employment sub index, which fell to 43.8 in June which is the lowest since January 2008, but we are suspicious of the January data because of the revision to the production of the data. If one sets those data aside, the employment index is now the lowest since the Spring of 2002, when the last recession began.

The new orders index fell to 48.6 in June from 53.6 in May and (abstracting from the January data) was the lowest since November 2001. Moreover, new export orders also slipped in June to 52.0 from 54.0 in May, though it still remains above the 50-threshold indicating it is still expanding, even if barely so. Surely, the weak U.S. dollar continues to help exporters, who are clearly the beneficiaries in an economy that is otherwise weak.

The prices paid index is concerning to us. It rose to 84.5 in June from 77 in May and is not only a cyclical high, but the highest since the data began. Non manufacturing industries are not immune to high oil prices and clearly are having to negotiate these headwinds like so many other industries.

On balance, this report is troubling in that it shows weak demand and high prices, which is a bad combination. Unlike the ISM manufacturing index, released earlier this week, today’s data has dipped below the 50-threshold and suggests weakness among U.S. non manufacturers. However, it does reflect the current themes in the broader U.S. economy and in that regard comes as little surprise.

TD Bank Financial Group

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