–ISM’s Nieves: Geopolitical Risks Remain but US Economy Better Than Others
–Nieves: US Services Sector Set for Further Pickup for Rest of 2023
–Nieves: Inflation Picture Different from Last Year as Supply Has Improved
By Max Sato
(MaceNews) – Business activity in the U.S. service sector was in positive territory for the eighth straight month in August, with the key index improving at a pace faster than expected, led by strong employment growth, according to the latest survey by the Institute for Supply Management (ISM) released Wednesday.
The main index, which shows the directional change of economic activity, jumped 1.8 percentage points to a six-month high of 54.5 after falling 1.2 points to 52.7 in July and rising 3.6 points to 53.9 in June. It had surged 6.0 points to 55.2 in January to recover much of the 6.3-point plunge to 49.2 in December, which was the first contraction since May 2020, when it registered 45.4.
The index came in stronger than the median economist forecast of 52.4. It is well above the recent low of 41.7 hit in April 2020 and 40.1 in March 2009, which is the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of 68.4 reached in November 2021.
The increase in the rate of growth for the services sector reflects increases in all four subindexes that directly factor into the composite services PMI and faster supplier deliveries, Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “Sentiment among Business Survey Committee respondents varies by industry; however, the majority of panelists are positive about business and economic conditions.”
Last month he said the majority of respondents were “cautiously optimistic” about business conditions and the overall economy, and that that there were no signs of recession in the U.S. economy.
Asked if the services sector is out of the woods and recession is not in the cards, Nieves told reporters, “We still have many geopolitical factors in play right now.” But he quickly added, “Overall, the U.S. economy looks much better than in Europe and others, in Asia specifically.”
The ISM August survey indicated that firms felt the second half of 2023 started to see some improvements over the first half, he said.
Nieves said the services sector should see a further pickup in the coming months going into the year-end holiday season after typically slower summer months. “We are going to stay on this path,” he said. “I think we are going to see this incremental growth for the balance of the year.”
“I’d like see the manufacturing get over the 50 base line as well, and that will definitely solidify strong footing as long as the economy is concerned,” he said.
ISM data released Friday showed U.S. manufacturing activity was in contraction territory for the 10th straight month in August as new orders remained sluggish but the pace of overall slowdown eased from July, raising hopes that the sector is headed for more stable operations. The sector index rose 1.2 percentage points to a six-month high of 47.6 in August, led by upticks in production and employment.
On the prices sub-index that showed an upward move in the past two months but stayed below 60 for the sixth straight month in August, Nieves said, “Being below 60 indicates that we are reaching the equilibrium in pricing.”
The prices index tends to fluctuate from month to month as firms react to changes in energy prices and labor costs, he said, adding, “Overall, if you look at the commodities prices compared to where they were last year, (they are) much different. As capacity has improved and production has improved across the board, it’s not that demand is exceeding supply in many of these commodity items.”
“Prices have settled,” said a public administration service provider told the IMS survey. “Warnings of a possible recession in 2024 are not being taken very seriously by top management.” The company said, “Our general feeling is that the (Federal Reserve’s) strategy for taming inflation and building a soft landing for the economy is working better than expected.”
“The summer slowdown is similar to those in recent years due to vacations,” a firm in the professional, scientific and technical services category said, “Third-quarter projections are close to expectation. Inflationary costs are mostly in fuel and fuel-related commodities, having an adverse effect on profits.”
A construction service provider said sales on a national level have been strong. “Commodity material prices remain stable, and we are finding areas for cost reductions,” it said. “Material availability has returned to pre-COVID-19 levels.”
Of the four sub-indexes that directly factor into the services PMI, growth in business activity edged up after a slip in July and a surge in June, the pace of increase in new orders also picked up, employment indicated strong growth after slowing the previous month, and supply deliveries stayed on a recovery track.
The business activity index rose a slight 0.2 percentage point to 57.3 in August after slipping 2.1 percentage points to 57.1 in July and jumping 7.7 points to a five-month high of 59.2 in June to recover most of its declines seen in the previous four months. The readings of 51.5 in May and 52.0 in April were three-year lows.
The new orders index posted a solid 2.5-point gain to a six-month high of 57.5 in August after edging down 0.5 point to 55.0 in July from 55.5 in June, when it rose 2.6 points. The index indicated expansion for the eighth consecutive month after contracting in December for the first time since May 2020.
The employment index jumped 4.0 points to 54.7 in August, hitting the highest since 56.1 in November 2021, after falling 2.4 points to 50.7 in July and rebounding 3.9 points to 53.1 in June and slipping below the key 50 line for the first time in five months in May to 49.2, the lowest since 49.2 recorded in October 2022. The employment picture remains mixed as some firms continue struggling to backfill positions while others are holding steady to manage costs, Nieves told reporters.
The supplier deliveries index – the only ISM index that is an inverse indicator – registered 48.5 in August, 0.4 point higher than the 48.1 recorded in July. In the last six months, the average reading of 47.7 (with a low of 45.8 in March) reflects the fastest supplier delivery performance since June 2009, when the index stood at 46.0. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
In other details, the prices index rose 2.1 points to a four-month high 58.9 in August after gaining 2.7 points to 56.8 in July and losing 2.1 points to 54.1 in June, which was the lowest since 50.4 in March 2020. The index remains well below its record high of 83.2 hit in April and February 2022.
The inventories index rebounded 7.3 points to 57.7 in August after dropping 5.5 points to 50.4 in July, falling 2.4 points to 55.9 in June, surging 11.1 points to 58.3 in May and dipping 5.6 points to 47.2 in April. It indicates expansion for the fourth straight month.
The index for backlog orders slumped 10.3 points to 41.8 in August after rising 8.2 points to 52.1 in July to be in expansion territory for the first time in five months in light of improving supply chains. It rose 3.0 points to 43.9 in June and fell 8.8 points to 40.9 in May, which was the lowest reading since 40.0 in May 2009.
The new export orders index rose 1.0 point to 62.1 in August after slipping 0.4 point to 61.1 in July and rebounding 2.5 points to 61.5 in June and falling 1.9 points to 59.0 in May.
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Contact this reporter: max@macenews.com
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