U.S. ISM Non-Manufacturing Index Slightly Better Than Expected

• The ISM non-manufacturing index was 50.6 in August, compared to 49.5 in July.
• The employment sub index fell in August to 45.4 from 47.1 and is the fourth consecutive month with a sub-50 reading.
• The new orders index rose modestly to 49.7, though it has remained below 50 for three consecutive months now.

The ISM non manufacturing index was a little better than expected at 50.6 in August, compared to an expectation for 49.5. This underlying cross section of data suggests general sluggishness in the non-manufacturing sector and that is consistent with the overall slowdown in U.S. economic activity. The important takeaways from this report include the weakness of the employment sub index, continued sluggishness in the new order flow, but also the alleviation of some price pressures and overall business activity perked up modestly in August.

The employment sub index was 45.4 in August, and suggests ongoing weak demand for non-manufacturing labour. In the first eight months of the year, there has been only one in which this subcomponent has posted a reading of 50 or better, so it does point to underlying trend weakness in the labour market.

Other components were also weak. The new orders component was 49.7 in August, which is a bit better than in July, but still remains below 50, suggesting the order flow is soft. Moreover, there was some moderation in the backlog of orders in August, and in conjunction with yet another decline in new export orders to 44.5 in August, it suggests that the pipeline for non-manufacturing orders is indeed weak. By contrast, current activity was not quite as bad, since it was 51.6 in August, compared to 49.6 in July.

Lastly, the prices paid index fell to 72.9 in August from 80.8 in July. This is good news for producers who have had to contend with higher input prices, which has forced the tough decision of absorbing these higher prices or trying to pass them through to consumers.

On balance, this is a lacklustre report and shows that the non-manufacturing sector is likely to be constrained by a poor order flow. There has already been evidence of a knock-on effect for employment trends in associated sectors.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.