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The ISM Non-Manufacturing Index failed to reach its expected target today, posting a drop from 58.0 in December to 56.7 in January vs 57.2 expected by most analysts, although others such as Goldman Sachs has predicted a sharp drop.

Key Takeaways

• The ISM Non-Manufacturing Index fell below expectations, likely creating negative pressure on the US dollar and causing gold to tick upward in the process.
• The unexpected dip was led by a sharp 5% decline in new orders.
• Respondents were broadly optimistic about business conditions but expressed concerns over the impact that the recently-ended shutdown may have.

The index has fallen 1.3% overall, led by a decline in new orders. Business activity showed a 1.5% decrease from 61.2% to 59.7% on a monthly basis. Respondents cited flu season and the end of holiday season volume as likely reasons for the decline in growth which remains in positive territory for the 114^th consecutive month.

Nine industries saw growth in business activity, led by transportation & warehousing, while eight industries saw decline, led by agriculture.

Meanwhile, new orders dipped from 62.7% to 57.7%. Dairy farms going out of business has possibly had a knock-on effect with less demand for livestock feed causing a decline in new orders in agriculture, while respondents also mentioned difficulty in keeping pace with increased demand for services.

Warehousing and transportation led the growth in new orders along with nine other industries while the five industries seeing a reduction included retail trade, agriculture, forestry, fishing and hunting, information, and other services in that order.

Finally, employment in the non-manufacturing sector grew overall, with real estate seeing the most growth along with nine other industries. On the other hand, arts, entertainment and recreation, retail trade, information, and management of companies and support services saw decline. Employment grew 1.2% overall, rising from 56.6% to 57.8%.

CIBC: #ISM non-manufacturing index indicates US #services economy still performing well. "While the index ticked down in line with our expectations to 56.7 for January, from an upwardly-revised December reading of 58.0, the index is still entrenched in expansionary territory"

— Cambridge (@Cambridge_FX) February 5, 2019

Expert Outlook

Many survey respondents mentioned the shutdown as an impact on their industry performance. Construction respondents in the survey are quoted as saying

“Business has slowed well below expectations as our customers deal with the effects of economic situations exacerbated by the government shutdown.”

On the other hand, respondents in finance and insurance stated that the shutdown was not affecting their business. Management of companies and support services cited volatile prices due to tariff restrictions, a reminder that the trade war is ongoing.

Professional, scientific and technical services respondents are quoted as saying “We are trying to hold out through the government shutdown. Currently, our work is continuing with already obligated prior-year funds. We have not had to suspend any activities.

The shutdown is affecting the United States Agency for International Development’s [USAID] and the Department of State’s ability to process actions, share information or plan for the future. That is the shutdown’s effect on us. The longer it lasts, the greater the disruption.”

The public administration sector pointed to “apprehension regarding overall economic conditions due to uncertainly of the partial government shutdown, its effect on business climate and lack of national strategic direction.”

Market Reaction

Following losses earlier in the day, gold ticked upward briefly immediately after the news but the rally was short-lived. Spot gold has sunk back down to the mid-range and is trading down -0.14% at $1,315.03/oz with a high of $1,316.79/oz and a low of $1,311.07/oz. The poorer-than-expected non-manufacturing report may yet cause buying pressure later in the day.