US: ISM Nonmanufacturing moderates but remains firmly in expansion territory - Nomura

Analysts at Nomura note that the US ISM nonmanufacturing index declined 2.7pp to 57.4 in November, slightly more than expectations (Nomura: 58.6, Consensus: 59.0). However, the top-line index remains firmly within expansionary territory, indicating sustained momentum in the nonmanufacturing sector albeit at a slightly slower pace, they further explain.

Key Quotes

“The prior two months' readings of 60.1 and 59.8, the highest since August 2005, were likely unstainable. November's reading of 57.4 sits just above the six-month moving average, consistent with other healthy incoming economic data.”

“Part of the decline in the headline index can be attributed to some moderation in the supplier deliveries index, which was temporarily elevated due to supply chain disruptions after the recent inclement weather. Usually, elevated readings of the supplier delivery index indicate an uptick in demand, a positive sign for growth. However, after the active hurricane season earlier this year, supply chain disruptions resulted in elevated readings likely unrelated to increased demand.” 

“Thus, some of the decline in today’s reading merely reflects lingering weather effects, with possible further declines in future months. In yesterday’s report, respondents from health care & social assistance noted that lingering effects from Hurricane Maria continued to affect pharmaceutical supplies. While the supplier delivery index remains elevated relative to pre-hurricane levels, incoming data since the hurricanes have largely been positive for demand. Thus, a full reversal of the supplier delivery index to pre-hurricane levels may not be expected.”

“The business activity index declined only 0.8pp. However, new orders (-4.1pp), employment (-2.2pp) and new export orders (-3.0) also moderated somewhat, indicating that not all of the pullback in November can be attributed to the supply chain recovery. Elsewhere, the prices paid index declined 2pp to 60.7 but remains above 60 for the third consecutive month, indicating moderate price pressure. While the employment indicator declined slightly, the elevated level should still be consistent with a healthy payroll employment gain in November.”

“Respondent comments for retail trade indicated some slowing in Q4 growth relative to Q3. Moreover, the lack of optimism from retailers in general could pose some downside risk for the upcoming holiday shopping season. Other industries, however, reported steady or increasing growth. Overall, November’s ISM nonmanufacturing report, while showing slight moderation in the pace of growth, is consistent with strong incoming data to close out 2017.”