–ISM’s Nieves: Purchasers’ Sentiment Mixed; Some Optimistic, Others Concerned about Inflation, Interest rates and Geopolitical events
–Nieves: Too Early to Tell How Labor Strikes Will Affect Services Sector
–Nieves: Given Rise in New Orders, Sector Might See an Uptick in November
By Max Sato
(MaceNews) – Business activity in the U.S. services sector was in positive territory for the 10th straight month in October, but it slowed from September amid heightened geopolitical risks, rising labor costs overall and shortages for some industries, according to the latest survey by the Institute for Supply Management released Friday.
The main index, which shows the directional change of economic activity, fell 1.8 percentage point to a five-month low of 51.8, but stayed above the break-even point of 50.0, thanks partly to a rise in new orders. Previously, the index dipped 0.9 point to 53.6 in September, rose 1.8 points to a six-month high of 54.5 in August and fell 1.2 points to 52.7 in July. It had surged 6.0 points to 55.2 in January to recover much of the 6.3-point plunge to 49.2 in December, which was the first contraction since May 2020, when it registered 45.4.
The index came in below the median economist forecast of 53.0. 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.
Separate ISM data released Wednesday showed U.S. manufacturing activity was in contraction territory for the 12th straight month in October, slowing at a faster pace than in September, as demand remains soft, leading to a sharp drop in new orders, slower growth in production and more aggressive layoffs.
“The services sector continues to slow, with decreases in the Business Activity and Employment indexes,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “Sentiment among Business Survey Committee respondents’ comments is mixed, with some optimistic about the current steady and stable business conditions and others concerned about such economic factors as inflation, interest rates and geopolitical events.”
“Employment-related challenges are also prevalent, with comments about increasing labor costs, as well as shortages,” he said, adding that employment regains a “mixed bag” for the services sector.
“In general, commodity prices are coming down, but some categories, especially labor, are still elevated and will remain so for the immediate future,” a firm in the accommodation and food services category told the ISM.
A company in the health care and social assistance industry noted that labor pressures continue, particularly in areas that are hard to recruit: “Filling front-line and lower-skill labor positions has gotten very expensive because of competition from large companies and logistics providers.”
Geopolitical risks hurt new export orders in the October survey but they could also pose a threat to domestic price stability. An education service provider said, “We are also leery of potential increases in fuel costs due in part to the unrest in the Middle East. If fuel costs rise, it will have a negative impact on our budget as we strive to continue normal operations on our campus.”
“Due to the Israel-Hamas war, communications with clients in the Middle East are pretty much shut down,” a firm from the professional, scientific and technical services industry said.
It is still a little too early to tell whether labor strikes in the U.S. will have a good or bad impact on the overall services sector, Nieves told Mace News.
One comment from the retail automotive industry showed that the auto worker strike has not had much of an impact in the short term, “but they are definitely concerned about production capability and availability of vehicles going forward, and that it is more of an impact on the manufacturing side at this juncture, compared to what we are seeing in the services,” he said.
On the other hand, the strike by Hollywood actors “is impacting the topline revenue because they don’t have all the content available” for TV shows and movies, Nieves said.
“The United Auto Workers (UAW) strike is having no impact so far — our inventory is in good position for now,” a retailer told the ISM.
But a wholesaler said in the October survey, “The UAW strike and potential government shutdown have created risk and caution for our customers who have pulled back on purchases beginning this month.”
Asked how the services sector is doing toward the end of the year and what outlook it may have for 2024, Nieves said, “Geopolitical concerns are definitely putting a damper on demand right now.”
“However, looking at the new orders index at 55.5 leaves me to believe that we will see a higher reading (of the overall index) next month, especially approaching the holiday season,” he said, noting that the ISM manufacturing sector survey also indicates that the factory sector has bottomed out.
“Indications are that we are not going to have a severe pullback by any stretching; in fact, we might have a little bit of an uptick going forward,” Nieves projected. “We have to see how it gets us ready for 2024 but I think we will finish up fairly decent in the last quarter (of 2023).”
The ISM’s semi-annual survey on both manufacturers and service providers, due on Dec. 15, will show sales projections and capital investment plans by member firms for next year.
Of the four sub-indexes that directly factor into the services PMI, growth in business activity slowed sharply, new orders rose at a faster pace, employment conditions eased to just above the neutral line, and supply deliveries were faster due to higher capacity, improved supply chains and waning demand.
The business activity index plunged 4.7 percentage points to a five-month low of 54.1 in October after rising 1.5 points to 58.8 in September, edging up 0.2 point to 57.3 in August, slipping 2.1 points to 57.1 in July and jumping 7.7 points to a five-month high of 59.2 in June to recover most of its declines seen in the previous four months. The readings of 51.5 in May and 52.0 in April were three-year lows.
The new orders index rose 3.7 points to 55.5 after slumping 5.7 points to a nine-month low of 51.8 in September, rising 2.5 points to a six-month high of 57.5 in August, edging down 0.5 point to 55.0 in July from 55.5 in June, when it rose 2.6 points. The index indicated expansion for the 10th consecutive month after contracting in December for the first time since May 2020 (41.3).
The employment index fell 3.2 points to 50.2 in October after easing 1.3 points to 53.4 in September, jumping 4.0 points in August to 54.7 (the highest since 56.1 in November 2021), and falling 2.4 points to 50.7 in July and rebounding 3.9 points to 53.1 in June. It slipped below the key 50 line for the first time in five months in May to 49.2, the lowest since 49.2 recorded in October 2022.
The supplier deliveries index — the only ISM index that is inversed — fell 2.9 points to 47.5 in October after rising 1.9 points to a 10-month high of 50.4 in September (the first time that it had popped above 50 since November 2022) and edging up 0.4 point to 48.5 in August. The index returned to contraction territory, indicating that supplier delivery performance was ‘faster’ in contrast to the ‘slowing’ status from the previous month. In the last eight months, the average reading of 48.0 (with a low of 45.8 in March) reflects the fastest supplier delivery performance since June 2009, when the index stood at 46.0. A reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
In other details, the prices index fell 0.3 point to 58.6 after being flat at 58.9 in September, rising 2.1 points to a four-month high 58.9 in August, gaining 2.7 points to 56.8 in July and losing 2.1 points to 54.1 in June, which was the lowest since 50.4 in March 2020. The index remains well below its record high of 83.2 hit in April and February 2022.
The inventories index slumped 4.7 points to 49.5 after falling 3.5 points to 54.2, rebounding 7.3 points to 57.7 in August, dropping 5.5 points to 50.4 in July and falling 2.4 points to 55.9 in June. It indicates the first contraction in six months.
The index for backlog orders rose 2.3 points to 50.9 after rising 6.8 points to 48.6 in September, slumping 10.3 points to 41.8 in August and rising 8.2 points to 52.1 in July to be in expansion territory for the first time in five months in light of improving supply chains. It rose 3.0 points to 43.9 in June and fell 8.8 points to 40.9 in May, which was the lowest reading since 40.0 in May 2009.
The new export orders index plunged into contraction after having grown for six months, down 14.9 points at 48.8, after rising 1.6 points at 63.7, climbing 1.0 point to 62.1 in August, slipping 0.4 point to 61.1 in July and rebounding 2.5 points to 61.5 in June.