On Tuesday, shortly after the opening bell, the Institute of Supply Management (ISM) reported that the non-manufacturing index (NMI), which tracks the service sector of the economy, jumped 3.0 percentage points in February to 59.7%, surpassing expectations of 57.2%, following January's 56.7% reading. The better-than-expected results comes after last week's PMI report (here), which missed expectations, coming in at 54.2% vs. consensus of 55.8%.

Recall that any reading above 50% represents expansion while anything below 50% indicates a contraction. The higher the reading is above 50%, the faster the rate of growth. Additionally, according to the ISM, an NMI reading above 48.6%, over time, is usually indicative of an expansion of the overall economy.

For perspective, over the past 12 months, the NMI has averaged 58.7% with a high of 60.8% and a low of 56.7%.

Source: Institute of Supply Management, September 2018 Non-Manufacturing ISM® Report On Business®

Overall, December marked the 109th consecutive month of growth in the non-manufacturing sector and the 115th consecutive month for the overall economy as indicated by the NMI. This compares with 118 consecutive months of growth (in the overall economy) as indicated by PMI, released last week.

Importantly, according to Anthony Nieves, chair of the Institute for Supply Management, "The past relationship between the NMI and the overall economy indicates that the NMI for February (59.7 percent) corresponds to a 3.9-percent increase in real gross domestic product (GDP) on an annualized basis."

Making up the reading, business activity/production rallied 5.0 percentage points (to 64.7%) in February (indicating expansion at a faster pace), expanding for the 115th straight month, while new orders, which have now expanded for 115 consecutive months, surged 7.5 percentage points (to 65.2%). On the other hand, Employment fell 2.6 percentage points (to 55.2%) in February (indicating expansion at a slower pace), marking the 60th consecutive month of growth, and the prices index, which has now increased for 21 months, fell by 5.0 percentage points last month (to 54.4%).

Source: Institute of Supply Management, September 2018 Non-Manufacturing ISM® Report On Business®

Digging deeper, 18 non-manufacturing industries exhibited growth in February led by Transportation & Warehousing; Management of Companies & Support Services; Wholesale Trade; Mining; Educational Services; Utilities; Other Services; Real Estate, Rental & Leasing. No industries indicated a contraction.

Lastly, in order to help members use this report to better gauge their own investments, we want to include a few quotes from ISM survey respondents in the various industries covered, pulled directly from the ISM report:

  • "We are anxiously awaiting decisions in the next couple of weeks on the fate of the proposed tariffs on China. High Chinese commitments to agriculture output will put cost pressure on food and restaurant margins." (Accommodation & Food Services)
  • "The beginning of the year is generally our slowest time of year in the health-care industry. [Activity] will gradually pick up until April, then be steady until the fourth quarter, when there will be a large increase." (Health Care & Social Assistance)
  • "Still strong in all areas, due mostly to commercial construction activity." (Construction)
  • "The local economy is doing well. Business lending remains competitive. The rise in interest rates have helped boost our net interest margin." (Finance & Insurance)
  • "Business continues to stay steady, with little drop off. However, we are more concerned about tariffs in the short term, since there seems to be no agreement. However, we do believe it will be a short-lived issue. In the long term, tariffs will force our suppliers to source elsewhere, which will levy more competition from manufacturers in other low- or non-tariffed countries and even in the U.S. Ultimately, the tariffs will force an improvement to the overall supply chain and better mitigate supply risk in our industry." (Management of Companies & Support Services)
  • "Increased activity level over the end of 2018." (Mining)
  • "Business continues [to] improve, and we expect it to continue through 2019. Domestic trucking availability is improving." (Other Services)
  • "Confidence is returning in the marketplace, but tariff surcharges are still in place." (Retail Trade)
  • "Tariffs continue to have an impact on our business. The contractor labor shortage continues to be the biggest supply challenge for our company and others in our region and industry." (Utilities)
  • "Seeing increases in business activity. Projecting strong sales for the month, stable prices and generally good fill rates from suppliers. Some spot outages, mostly due to capacity and planning limitations or shortfalls." (Wholesale Trade)

All in all, the report serves to back our view that this U.S. expansion still has room to run. As a result we continue to believe that a U.S./China trade deal remains the next potential catalyst for the market, with the size of that move, and the question of whether it is viewed as a "sell the news event" (a view we believe would ultimately be misguided) or puts us in rally mode, heavily reliant on the ultimate terms of the deal and the decisions made regarding tariffs already in place (if they are maintained, reduced or removed completely).

Members interested in digging even deeper can view the official release here.