–ISM’s Nieves: Still Need to See How Things Evolve in April-June Quarter After Strong Start to 2023
–Nieves: Possible Negative Impact of Further Fed Tightening Not Reflected in ISM Data
By Max Sato
(MaceNews) – Business activity in the U.S. service sector stayed in positive territory in February after showing an earlier-than-usual seasonal rebound in January as new orders continued rolling in, supply deliveries improved and employment rose at some industries despite tight labor conditions, according to the latest survey by the Institute for Supply Management (ISM) released Friday.
The main index, which shows the directional change of economic activity, was little changed at 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 stronger than the median economist forecast of 54.5. 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.
“We still have to see how things ramp up or decline going into the spring but right now it looks like we are on this path of steady incremental growth in the service sector,” Anthony Nieves, chair of the ISM Services Business Survey Committee, told reporters. April-June will be a telltale quarter to assess the sustainability of the service sector improvement, he said.
Asked about the possible negative impact of further tightening by the Federal Reserve on consumer spending and firms’ financing costs, he replied, “It’s not reflected in the strength of numbers that we are seeing right now.”
Of the four sub-indexes that directly factor into the services PMI, business activity showed slower growth, new orders increased at a faster pace after bouncing back sharply in January, employment indicated growth after being nearly flat and supply deliveries were faster after being neutral.
The business activity index stood at 56.3, a 4.1-percentage point decrease compared to the reading of 60.4 percent in January, when it jumped 6.9 points.
The new orders index expanded in February for the second consecutive month after contracting in December for the first time since May 2020. It rose 2.2 points to 62.6 after surging 15.2 to 60.4 in January.
“Business Survey Committee respondents indicated that they are mostly positive about business conditions,” Nieves said in a statement. “Suppliers continue to improve their capacity and logistics, as evidenced by faster deliveries. The employment picture has improved for some industries, despite the tight labor market. Several industries reported continued downsizing.”
The supplier deliveries index — the only ISM index that is inversely calibrated — registered 47.6 in February, indicating the fastest delivery performance since June 2009, when the index was at 46. The February reading is 2.4 points lower than the 50 in January. A reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.
The employment index rose 4.0 points to 54.0 in February from 50 in January, when it rose 0.6 from 49.4 in December. The information technology industry is among those shedding workers to maintain profit margins but some others are still trying to backfill positions amid the tight labor market.
Inflationary pressures are easing as fuel prices for trucking have come down but overall prices growth is still strong. The prices Index fell 2.2 percentage points to 65.6 in February after slipping 0.3 point to 67.8 in January. The index is well below its record high of 83.2 hit in April and February 2022.
The February survey showed that firms are “becoming more cost conscious” and while higher prices an impediment somewhat, it is not stalling business activity, Nieves said.
“Customers now are very cost conscious and looking for lower-priced product options,” a wholesale trader told the ISM.
“Upward pricing pressures have eased slightly but are still elevated,” a firm in the finance and insurance industry said. A company in the health care and social assistance category said, “Inflation, though somewhat eased from the peaks of the past six months, continues to drive higher-pricing demands from suppliers.”
The inventories Index grew in February after contracting for eight consecutive months; the reading of 50.6 is up 1.4 percentage points from January’s figure of 49.2 percent. The inventory sentiment index at 55.3 percent, down 0.5 point from January’s 55.8, expanded for the third straight month after four straight months in contraction, indicating it is “too high.”
Contact this reporter: max@macenews.com
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