–ISM’s Nieves: Concerned About Corporate Mindset of Cost Containment at Threat of Recession
–ISM’s Nieves: Service Providers See No Recession in 2022, Some Pullback in 2023
–ISM’s Nieves Agrees with ISM Manufacturing Outlook: Contraction Ahead but Not Necessarily Recession
By Max Sato
(MaceNews) – U.S. service sector growth slowed for the second straight month in October as new orders fell amid uncertainty over future economic growth and firms struggled with tight labor markets and supply delays, according to the latest survey by the Institute for Supply Management (ISM) released Thursday.
The main index, which shows the directional change of economic activity, indicated the sector continued growing for the 29th straight month, staying above the key 50 line, but it fell 2.3 percentage points to 54.4 in October from 56.7 in September, when it dipped 0.2 point from August’s 56.9. The index fell below 55.3 in June, the previous low for this year, and hit the lowest since 45.2 in May 2020.
The index stayed well above the recent low of 41.5 hit in April 2020 and 40.1 in March 2009, 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 18 industries surveyed, 16 posted increases in activity while decreases were seen among management support services amid softer export demand and real estate firms, which have been hit by rising mortgage rates.
“The sector had a pullback in growth for the second consecutive month in October due to decreases in business activity, new orders and employment,”
Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement, adding that supplier deliveries continued to slow.
“Based on comments from Business Survey Committee respondents, growth rates and business levels have cooled,” he said. “There are still challenges in hiring qualified workers, and due to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions. Supply chain and logistical issues persist but are not as encumbering as they were earlier in the year.”
The service sector’s “eclectic nature,” ranging from hotels and restaurants to transportation and construction, is helping it cope with the impact of slowing global growth better than the manufacturing sector, which is “tied to production and output,” Nieves told reporters.
“Despite the negative inflation news, higher gas prices and concerns of a recession, our restaurant sales have been resilient during what is typically a seasonal slump,” a company from the accommodation and food services category told the ISM. “We are positive to 2019 (pre-coronavirus pandemic), and traffic is down only about 4 percent, so it’s recovering.”
Asked about the outlook provided Tuesday by Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, that he sees contraction ahead but not necessarily recession, Nieves replied, “I concur with his assessment. We will see some pullback going forward but right now as we are finishing up the last quarter (of 2022), all indications are that we will have a good holiday season.”
Historically, the service sector tends to see a pullback in January and things start to get on track again in February but there is no clear outlook for the first three months of 2023 at this point, Nieves said.
“There has been a great deal of uncertainty as to what the economic conditions will be, going forward,” he said, adding that the Federal Reserve is raising interest rates to fight high inflation while unemployment stays low. “We have to wait and see what the first quarter of 2023 looks like.”
“All of our respondents from our semiannual forecast prior said that they do not see any recession in 2022,” Nieves said. “Going into 2023, there are some uncertainties. They do feel like there might be some pullback. As far as recession is concerned, we don’t have all the elements necessary to pull us into recession.”
Nieves said his concern is that companies may go into “the mindset of strategic cost management and containment” when there is a threat of recession.
The ISM is in the process of collecting data for the next semiannual economic forecast due on Dec. 13, in which respondents are expected to see some pullback in business conditions, according to the ISM. The latest projection released in May showed respondents expected the U.S. economy to continue expanding for the rest of 2022 but it didn’t provide forecasts for 2023.
A company in the professional, scientific, and technical services category told the ISM in its October survey: “As we prepare for a recession, our stakeholders, clients and vendors are all tightening their belts and reducing new spend. We are focusing on strategic renewals and expanding only where necessary with our closest vendor partners for our most critical tech projects.”
“Business remains tepid,” a firm in the agriculture, forestry, fishing, and hunting category said. “We have a general concern that sales volumes are trending down as buyers communicate that they’re planning to buy only what they need for immediate sales.”
The business activity index slumped 3.4 points to 55.7 in October from 59.1 percent in September. The new orders index fell 4.1 points to 56.5 from 60.6 percent the previous month.
The supplier deliveries index rose 2.3 points to 56.2 in October from 53.9 in September. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
The employment index fell 3.9 points to 49.1 in October from 53.0 in September, posting contraction for the fifth time this year.
“It has become more challenging to maintain our level of service, due to increased demand, extended supplier lead times and the hyper-competitive employment market,” said a company in the transportation and warehousing services.
After five straight months of decreases, the prices index rose 2.0 points to 70.7 in October from 68.7 in September, but it is well below a record high of 84.6 hit in April this year.
Services firms continue struggling to replenish their stocks as the inventories index contracted for the fifth consecutive month. It rose 3.1 points to 47.2 in October from September’s reading of 44.1. The inventory sentiment index stood at 46.4, down 0.8 point from 47.2 the previous month, contracting for the third month in a row.