US ISM NonMfg: Services sector strengthens in November – TD Economics

Michael Dolega, Senior Economist at TD Economics, notes that following a pullback in October, the US Institute for Supply Management's (ISM) non-manufacturing index rebounded in November, rising 2.4 points to 57.2.

Key Quotes

“The headline print surprised to the upside, with markets calling for a more subdued rebound to 55.5.”

“Business activity rebounded strongly, rising 4 points to 61.7 – its highest level in over a year. The employment sub-index also surged, rising by 5.1 to 58.2. Notable gains were also had on both the exports and imports sub-indices, which rose by 1.5 and 1.0 points to 57 and 54, respectively.”

“Declines were largely modest and concentrated in the inventory sub-indices with the backlog of orders (1.0) also pulling back somewhat. The new orders sub-index was also down 0.7 but remained at a very healthy level of 57.0. Prices paid also notched 0.3 points lower to 56.3 during the month.”

“Nearly all of the 18 non-manufacturing industries surveyed reported growth in October, with real estate & leasing and public administration the only two industries to report contraction in activity.”

“Key Implications

• This was a solid report suggesting that the slight weakness experienced in October was transitory and may have been related to Hurricane Matthew, which struck the U.S. Southeast in early-October. Just like its manufacturing cousin, the nonmanufacturing index notched up a solid rebound in November, with healthy expansion across industries and sub-indexes.
• Particularly encouraging were the gains in business activity and employment. Together, these suggest that economic activity has accelerated after a slower start to the fourth quarter that may have been related to pre-election uncertainty and hurricane impacts. Moreover, while new orders pulled back slightly, they remain at a firm level, indicating that activity should remain upbeat into the New Year. 
• The prices paid subcomponent was little changed this month and remained close to its highest level since mid-2014. This highlights the fact that inflationary pressures are building and will likely manifest all the more as transitory factors dissipate. As such, we expect this report will only reinforce the notion that it is high time for the Fed to raise rates – something we expect next week.”