–ISM’s Nieves: Fed Tightening on Overall US Service Sector Seen Limited
–ISM: Demand for Services Still Strong; May’s Slower Growth Expected
–ISM: New Orders Index Rebounds, Prices Index Eases from April’s Record High
By Max Sato
with the ISM services index posting the seventh drop in the past 12 months, 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, indicated the sector continued growing for the 24th straight month, staying above the key 50 line, but it fell 1.2 percentage points to 55.9 in May, the lowest since February 2021, when it also stood at 55.9. It followed a 1.2-point drop to 57.1 in April, a 1.8-point rise to 58.3 in March and a 3.4-point slip to 56.5 in February. The index remained well below the record high of 68.4 hit in November 2021.
The new orders index gained 3.0 percentage points to 57.6 in May after falling 5.5 points to 54.6 percent in April. The business activity index fell 4.6 points to 54.5 from 59.1.
“Growth continues — albeit slower — for the services sector, which has expanded for all but two of the last 148 months,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “The sector’s slowdown was due to a decline in business activity and slowing supplier deliveries.”
“Covid-19 continues to disrupt the services sector, as well as the war in Ukraine. Labor is still a big issue, and prices continue to increase,” he said.
The employment index edged up to 50.2 in May from 49.5 in April, returning to expansion territory, and the backlog orders index grew, though at a slower rate (down 7.4 points to 52.0 from 59.4).
The supplier deliveries index eased 3.8 points to 61.3 in May. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases. The prices index dropped from the all-time high of 84.6 in April, decreasing 2.5 points to 82.1 percent, which was the first fall in four months and the lowest since 79.5 in September 2021.
Services firms continue to struggle to replenish inventories, as the inventories index grew, but at a slower rate: The reading of 51.0 in May is down 1.3 points from April’s 52.3. The inventory sentiment index, at 44.5 percent and down 2.2 points from April’s reading of 46.7 percent, contracted in May for the third consecutive month, “indicating that inventories are in ‘too low’ territory and insufficient for current business requirements,” Nieves noted.
“Supply chain improving, with more reliability of supplier deliveries,” an accommodation and food services provider told ISM. “Inflationary pressures increased on goods and services. Employment also improving in most markets.”
But an educational service provider noted: “Long lead times continue to plague equipment deliveries; higher prices or surcharges added to pricing proposals. The ban on Russian imports is causing a shortage of gasses, especially helium.”
“National consumer and builder demand continues to drive sales domestically,” a wholesale trader said. “Covid-19 in China continues to affect our supply chain more than the Russia-Ukraine war.”
Nieves told reporters that the impact of the Federal Reserve’s credit tightening aimed at taming hot inflation on the overall US service sector appears to be limited.
“Consumer sentiment has been trending down even before the Fed’s 50 basis point move,” he said, adding that the service sector is still in the midst of the pandemic with pent-up demand.
“We came out very hard and fast and we are responding to see this leveling off, and we are still seeing a good rate of growth here,” Nieves said, adding that the main index drop in May was expected.
The real-estate sector has been hit by low inventories amid labor and materials shortages during the pandemic while demand for homes remains high, he added.
Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, told reporters on Wednesday that there is an “early indication” that tightening by the Federal Reserve is causing “some softening of demand” while demand still high.
The US manufacturing sector index compiled by the ISM unexpectedly rose to 56.1 in May after slipping to 55.4 in April from 57.1 in March. It was the first rise in three months. Like service providers, manufacturers also continue to face labor shortages and global supply chain constraints.