–ISM’s Nieves: Service Index a Little Bit Ahead of Its Time: Post-Holiday Pickup Usually Comes in Late January to Early February
–Nieves: Employment Flat as Some Firms Cut Jobs While Others Still Trying to Fill Vacancies
By Max Sato
(MaceNews) – Business activity in the U.S. service sector bounced back into growth territory at the start of the new year, along with a global shift to spending on services from goods, as domestic new orders surged on some carryover from the previous year, according to the latest survey by the Institute for Supply Management (ISM) released Friday.
ISM official comments suggest that the sector may be a little ahead of its time in a usual rebound from a post-holiday lull, and that the outlook remains that demand will pick up in the second half of 2023 after a slowdown in the first half.
The main index, which shows the directional change of economic activity, jumped 6.0 percentage points to 55.2 in January after plunging 6.3 points to 49.2 (revised down from 49.6) in December, which was the first contraction since May 2020, when it registered 45.4. It rose 1.0 point to 55.5 (revised down from 56.5) in November.
The index came in stronger than the median economist forecast of 50.4. Some figures have been revised dating to 2020 in an annual update on the ISM’s seasonal adjustments. The index stayed well above the recent low of a revised 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 hit in November 2021.
Of the four sub-indexes that directly factor into the services PMI, business activity/production showed faster growth, new orders bounced back sharply, employment was nearly flat and supply deliveries were neutral.
The business activity/production index stood at 60.4, a 6.9-percentage point increase compared to the seasonally adjusted reading of 53.5 in December. The new orders index surged 15.2 points to 60.4 in January after contracting in December for the first time since May 2020, falling a sharp 10.6 points to 45.2.
“Business Survey Committee respondents indicated that capacity and logistics performance continue to improve,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “Although responses varied by industry and company, the majority of panelists indicated that business is trending in a positive direction.”
The services PMI for January at 55.2 corresponds to a 1.8-percent increase in real gross domestic product on an annualized basis, he said.
On the sharp rise in new orders, Nieves told reporters that firms had built up business into the holiday season in December and activity leveled off thereafter with a buildup in goods or services.
“Post-holiday, it has been more of a release of orders and an increase in business activity,” he said. “Some of the comments indicated that there is some carryover from 2022 into 2023 in new orders as well as business activity.”
A firm in the professional, scientific, and technical services category noted “modest increase in sales activity following the holiday slowdown” while a construction firm said, “New residential housing market is still reeling from mortgage rate increases. Sales have fallen off dramatically at entry-level price points, as costs are trending flat.”
On the upside, a company in accommodation and food services said, “Consumer confidence is returning, and people are more willing to spend money on luxury items.”
The employment climate is mixed, Nieves said. The services sector employment index stood at 50.0 in January, up 0.6 from a revised 49.4 in December, when it dipped 1.2 points into contraction after rebounding 1.4 points to a revised 50.6 in November and falling 3.1 points to a revised 49.2 in October.
There have been layoffs in the information and technology industry while others including food services and entertainment are adding jobs to deal with labor shortages, he said.
The supplier deliveries index registered 50.0 in January, indicating unchanged performance. It rose 1.5 points from 48.5 in December. The index inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
“Orders are strong, but it’s difficult to support customers’ expectations on delivery due to challenges in the supply chain,” a company in the other services category noted. A firm in retail trade told the ISM: “Coming off of peak season. Supply chains are solidifying, and capacities are better than in the past.”
“While there is still uncertainty in the marketplace, there is a general feeling that supply chain (issues) are relaxing,” an information service providers said. “There is no unrealistic expectation that challenging times are behind us, but we are cautiously optimistic about 2023.”
Inflationary pressures continued easing. The prices index slipped 0.3 point to 67.8 in January after dipping 2.0 points in December to a revised 68.1 from a revised 70.1 in November, following a 1.1-point rise to a revised 70.9 in October, which was the first increase in six months. The index is well below a record high of a revised 83.2 hit in April and February 2022.
The Inventories Index contracted for the eighth consecutive month in January; the reading of 49.2 is up 4.1 points from December’s 45.1.
The inventory sentiment index at 55.8, down 0.1 point from December’s reading of 55.9, expanded for the second consecutive month after four straight months in contraction, indicating it is “too high.”
“Respondents are telling us that they are still trying to burn off some personal protective equipment that seems to be lingering from the pandemic,” Nieves said.