US: ISM nonmanufacturing index raises warning flags about economic health - RBS

Research Team at RBS, notes that the US ISM nonmanufacturing index fell much more than expected, dropping from 55.5 in July to 51.4 in August (consensus 54.9, RBS 55.0).

Key Quotes

“At 51.4, the latest reading was the lowest level since February 2010 (50.8). As noted in the ISM press release, "The majority of the respondents' comments indicate that there has been a slowing in the level of business for their respective companies." We find the slide below 52 especially unsettling, as the index has averaged 55.2 during periods of economic expansion. The measure only dates back to mid1997 but the two times the headline figure fell below 52, it signalled a US recession.

Weakening was broad based in August, with sharp decreases in new orders (51.4 after 60.3) and business activity (51.8 after 59.3) measures. Employment fell from 51.4 in July to 50.7 in August—the lowest level since May. As shown in the chart below, the drop in this ISM nonmanufacturing survey's employment measure corroborates the softening in nonmanufacturing payroll growth reported by the BLS. Meanwhile, the supplier deliveries measure was nearly unchanged (51.5 after 51.0 in July).

The loss of momentum seen in both ISM factory and nonmanufacturing surveys in August is discouraging. A synthetic all economy ISM, based on the manufacturing and nonmanufacturing ISM reports, fell a sharp 4.0 points to 51.2 in August (lowest print since January 2010).

In August, 11 industries (out of 18) reported growth, down from 15 in July and a sevenmonth low. Some of the latest pullback could reflect a delayed reaction to Brexit after little initial evidence of a pullback in July. In the end, these data, along with the manufacturing ISM index (which signaled outright contraction), raise warning flags that momentum has slowed post-Brexit. We still believe this cautious, risk adverse Fed will wait for more information on the outlook and hold off from raising rates this year.”