US ISM Non-manufacturing: Businesses remain nervous about the outlook – Wells Fargo

Today’s data showed that the ISM non-manufacturing index rose to 56.4 in August. Analysts at Wells Fargo, point out the number suggests that broad activity is holding up, but the warn slower hiring and falling backlogs, indicate the gap between manufacturing and the rest of the economy may not be sustained. 

Key Quotes: 

“While the headline suggests that conditions remain OK at present, the details hint that businesses remain nervous about the outlook. The index on current activity posted the largest increase among all subindexes, leaping 8.4 points. New orders was not far behind, increasing 6.2 points to move back above 60. But hiring, which gives an indication of how businesses view the outlook beyond the next couple months, slowed in August. At 53.1, the index is at its lowest level in more than two years, and has led us to downwardly revise our estimate for tomorrow’s payroll report. We now expect to see payrolls rise by only 135K in August.”

“While the spillover effects from weakness in the factory sector seem generally contained at the moment, we still see the current environment as more fragile than the last time manufacturing activity was contracting. During 2015-16, slowing global growth was also dragging down manufacturing activity here at home. Consumers were relied upon to carry growth, which they did with gusto; real consumer spending rose 3.7% in 2015, the strongest pace of this expansion.”

“We expect real consumer spending to slow in the coming months, rather than continue to diverge from the path of factory output.”