–ISM’s Nieves: Activity Coming Off from Unsustainable Growth Rate Seen Before December Plunge
–Nieves Sees Employment as “Mixed Bag”: Tech Firms Cut Jobs, Some Other Industries Struggling to Find Qualified Workers
–Nieves: Inflationary Pressures Have Moderated; Hope Fed Rate Hike Pace Not So High as Before
By Max Sato
(MaceNews) – Business activity in the U.S. service sector was in positive territory for the third straight month in March but was slower as growth in new orders and employment decelerated, 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, slipped to 51.2 in March from 55.1 in February after surging 6.0 points to 55.2 in January and plunging 6.3 points to 49.2 in December, which was the first contraction since May 2020, when it registered 45.4.
The index came in much weaker than the median economist forecast of 54.4. 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.
“There has been a pullback in the rate of growth for the services sector, attributed mainly to (1) a cooling off in the new orders growth rate, (2) an employment environment that varies by industry and (3) continued improvements in capacity and logistics, a positive impact on supplier performance,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “The majority of respondents report a positive outlook on business conditions.”
Last month, Nieves told reporters that the service sector seemed to be on a path of steady incremental growth, and that April-June would be a telltale quarter to assess the sustainability of the sector improvement.
Asked about the slip in the main index for the sector, Nieves told reporters on Wednesday, “I’m always happy see anything above the 50 baseline. I would have personally preferred to see it in the mid-50s range.” Before the plunge in December, the index indicated strong growth that was not sustainable, he said.
“Hopefully, we stay in the mid-50s range going forward but it’s hard to say,” he added. “Anything beyond 50 is good for the overall economy.”
Of the four sub-indexes that directly factor into the services PMI, growth in business activity slowed further, the pace of increase in new orders decelerated sharply, employment showed growth but at a slower pace and the supply deliveries index fell further below 50, which indicated faster deliveries.
The business activity index stood at 55.4, a 0.9-percentage point decrease compared to the reading of 56.3 in February and down from 60.4 in January, when it jumped 6.9 points.
The new orders index expanded in March for the third consecutive month after contracting in December for the first time since May 2020, but it slumped 10.4 points to 52.2 from 62.6 in February, when it gained 2.2 points after surging 15.2 to 60.4 in January and plunging 10.6 points to 45.2 in December.
The supplier deliveries index — the only ISM index that is inversed — registered 45.8, in March indicating the fastest delivery performance since April 2009, when the index was at 45.5. The March reading is 1.8 percentage points lower than the 47.6 recorded in February. A reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.
The employment index stayed above the key 50 line in March but posted its first drop in three months, down 2.7 points at 51.3 after rising 4.0 points to 54.0 in February.
Nieves described business conditions as “a mixed bag”: The information and technology industry has been reducing payrolls while some others are finding it hard to find qualified workers. “Still experiencing shortages in general labor positions amid demand for higher entry-level wages.” an educational services provider told the ISM.
Inflationary pressures have eased further but there is still some price pressure. The prices Index dipped 6.1 points in March to 59.5, the lowest since July 2020 (57.5), after falling 2.2 points to 65.6 in February. The index is well below its record high of 83.2 hit in April and February 2022.
Asked about the price pressures from both the tight labor market and the uncertainty over goods prices in light of an output cut by crude oil producers, Nieves told reporters, “Some of the respondents’ comments indicated that there has been some increase in profit margins as well as the ability to … increase pricing.”
“I think overall we are starting to see this moderate, and hopefully we don’t see the interest rates continue to go up at strong increases as they have in the past,” Nieves said. Last year’s aggressive credit tightening by the Federal Reserve has hurt most notably the real-estate and leasing markets, he said.
“Prices are coming down but in small increments,” a firm in the transportation and warehousing industry said. “Food prices remain high, and availability continues to be a challenge.”
A firm in the health care and social assistance category reported, “Although patient volumes and revenues continue to be strong, labor and inflationary pressures have led to higher operating expenses, exceeding revenues and resulting in negative operating margins.”
The inventories index grew in March for the second consecutive month after contracting for eight months in a row; the reading of 52.8 is up 2.2 points from February’s figure of 50.6. “Responding comments indicate that inventories are starting to get to the right size,” Nieves said.
The index for backlog orders fell 4.3 points from 52.8 in February to 48.5 in March, reaching the lowest since May 2020, when it was at 46.4.
Asked if the 9.0-point decline in the imports index to 43.6 in March from 52.6 in February indicated weakening domestic demand, Nieves replied, “I think we have to wait for a month or two to see how things pans out.” Shipments from Asia were still recovering from earlier delays caused by the lunar new year in January and that there has been a buildup in backlogs in the past, he explained.
“I expect this to come back to over 50 within the next month or two,” he said.
Global economic slowdown is seen in exports, although 75% of the service sector respondents in the ISM survey relies solely on domestic demand. The new export orders index plunged 18.0 points to 43.7 in March from 61.7 in February, due mainly to slower activity in Europe.