The Institute for Supply Management’s (ISM) non-manufacturing index rose by modest 0.4 points to 60.7 in November. The headline print surpassed consensus expectations, which called for the index to pull back to 59.0.

The details of the report were constructive with most of the index’s key subcomponents rising on the month. Of note, the business activity subcomponent rose by 2.7 points to 65.2 – the highest level since January 2004. Prices paid (+2.6 points to 64.3), new orders (+1.0 points to 62.5) and backlog of orders (2.0 points to 55.5) also improved.

On the other hand, the employment subcomponent declined for the second month in a row (-1.3 points to 58.4). But, the subcomponent remains well in expansionary territory, and above its year ago level.

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Trade-related subcomponents were mixed. While imports rose by 3.5 points to 54.5, new export orders fell by just as much (to 57.5).

Comments from business owners suggest that they generally remain upbeat about current business conditions and the economy, particularly in domestically oriented sectors. However, they do note some concern about labor shortages, tariffs and rising costs for labor and materials.

Key Implications

The ISM non-manufacturing index joined its manufacturing counterpart last month, with activity picking up pace in November. Service sector expansion remains brisk, with the headline staying above 60-points for the third consecutive month, marking the best 3-months performance since inception of the index. Growth remains not just fast but also broad-based, with all but one industry (Agriculture, Forestry, Fishing & Hunting), reporting expansion in November.

Despite the upbeat mood among the survey respondents, the negative impact of tariffs on input prices and capital planning has been mentioned by several respondents. The weekend deal between the U.S. and China to hold off on additional tariffs for at least 90 days may help to alleviate some immediate concerns. However, the cloud of trade uncertainty will continue to weigh on business investment decisions until a comprehensive agreement between the two countries is in place.

As has been the theme in last several reports, firms continue to report challenges filling in positions. This report was no exception, with firms reporting difficulty finding workers and rising labor costs (for the second consecutive month). The second consecutive monthly decline in the employment subcomponent further corroborates this notion. With the labor market tightening further with every passing month, labor shortages will likely begin to weigh on employment growth and business expansion plans in the months ahead.

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