Analysts at Nomura explained that the ISM nonmanufacturing index increased 1.8pp to 58.6 in May, above expectations (Nomura: 58.0, Consensus: 57.6).
Key Quotes:
“The strength across subindices was broad-based and is consistent with a rebound in other business surveys during the month. Moreover, the May survey punctuates a string of solid data for May that indicates an acceleration in US economic activity. However, on the downside, the new export orders index for the nonmanufacturing survey in May fell 4pp, consistent with the 2.1pp decline in the ISM manufacturing counterpart that adds additional evidence to some divergence between the US and external outlooks.”
“Looking at the details of the May nonmanufacturing report, improvements in the new orders index (+0.5pp) and business activity (+2.2pp) indices indicate a pick-up in both near-term momentum and contemporaneous activity. In addition, the backlog of orders index jumped 8.5pp to 60.5, consistent with acceleration in demand. The prices paid index increased 2.5pp to 64.3 as upstream price pressures, partly from higher crude oil prices, continue to pass through to businesses. The employment index increased 0.5pp to 54.1 as service-sector employment rose strongly during May. Finally, as with May’s ISM manufacturing report, the new export orders index in the nonmanufacturing report fell sharply by 4pp to 57.5, a still-expansionary reading but perhaps adding additional evidence to the modest slowdown in external growth we have seen so far in 2018, possibly highlighting the divergent US and external outlooks. However, we think the decline in export order indices across both surveys poses some downside risk to US exports over the near term. That said, given that mining and agricultural firms are included in the nonmanufacturing index, and that these firms may be disproportionately affected by tariffs and export orders, service exports may be less affected relative to goods exports.”
“While May numbers were strong, there is some downside risk to June given the recent developments on US trade policy, particularly the recently imposed steel and aluminum tariffs on the major US suppliers of the EU, Canada and Mexico. Respondents were generally upbeat in the nonmanufacturing May survey but still listed trade tensions as a material business concern. However, this risk could be more acute in the manufacturing sector as those businesses will likely be more exposed to steel or aluminum import disruptions.”
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