US: Declining ISM Nonmanufacturing still positive on growth - Nomura

Research Team at Nomura, notes that according to the Institute for Supply Management, the US nonmanufacturing index declined to 54.8 in October from 57.1 in September, below market expectations (Nomura: 57.2, Consensus: 56.0).

Key Quotes

“Although the headline figure disappointed, the underlying details suggest activity expanded at a good pace in the nonmanufacturing sector.

The business activity index edged lower by 2.6 points but remained well above 50 at 57.7, implying that on balance businesses saw activity continue to expand in October. Demand remained firm in October as the new orders index was at elevated levels at 57.7 while backlog of orders was unchanged at 52.0.

On the downside, the inventory sentiment index was at 62.0 in October from 64.5. It appears that businesses continue to feel that their inventory levels are too high for current demand. This suggests that although demand remains strong, we may not see firms replenish their stock levels as fast as the pace of sales going forward.

Employment activity was not as strong in October compared with September as the employment index declined to 53.1 from 57.1, but a reading over 50 still suggests, on net, businesses increased employment rather than decreased. Trade indicators were steady at prior levels, with the new export orders index declining only 1 point to 55.5 but the imports index edging up to 53.0.

Bottom line is that, although the headline number was not as strong as expected, the underlying details suggest that economic activity in October expanded at around the same pace as seen in September. This seems to be the general tenor of the data already published for October. So far, the ISM manufacturing index was steady at 51.9 from 51.7, the pace of vehicle sales increased to 17.9mn SAAR from 17.65mn SAAR and ADP employment showed healthy job gains of 147k workers. All suggest that the momentum gained in September likely carried over into October.”