–ISM Services Index Falls to 7-Month Low of 50.6 from 52.7 in November
–ISM’s Nieves: Employment Picture Hasn’t Changed Much
–Nieves: Services Sector Expected to Be on Growth Path in 2024
By Max Sato
(MaceNews) – Business activity in the U.S. services sector managed to expand for the 12th straight month in December but the key index unexpectedly slumped in light of a seasonal drop in employment and slower new orders amid uncertainty over economic growth and geopolitical risks, 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, fell 2.1 percentage points to a seven-month low of 50.6 in December after rising 0.9 point to 52.7 in November and falling 1.8 points to 51.8 in October. The index surged 6.0 points to 55.2 in January 2023 to recover much of the 6.3-point plunge to 49.2 in December 2022, which was the first contraction since May 2020 (45.4).
The index came in below the median economist forecast of 52.7 and the year’s average of 52.8. 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.
“The services sector had a pullback in the rate of growth in December, attributed to the decrease in the rate of growth for new orders and contraction in employment,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “Respondents’ comments vary by both company and industry. There are concerns related to economic uncertainty, geopolitical events and labor constraints.”
“The employment picture has not changed all that much,” Nieves told reporters, adding that service providers tend to secure workers before the busy holiday season but there is not much hiring activity from Christmas to the New Year. They are expected to resume hiring in mid-January, he said.
Last month, he told reporters that the labor market conditions remained a “mixed bag,” with construction firms and in-person service providers finding it hard to find workers.
In addition to the seasonal factor, comments from respondents in the December report showed uncertain growth prospects are keeping some firms cautious about hiring. “Layoffs have increased in the professional services and staffing industries over the past several months as companies try to reduce cost amid the climate of economic uncertainty and decreasing customer demand,” a surveyed firm told the ISM.
“Revenues remain strong but labor is still constrained, and suppliers are floating price increases beginning January 1, which will likely further reduce already low operating margins,” a firm in the health care and social assistance industry said.
A firm in the professional, scientific and technical services category said, “Companies are taking a wait-and-see approach to increasing labor costs as they continue to try to do more work with less people.”
Looking ahead, Nieves said, “Overall, 2024 should continue on the path of growth for the services sector.”
The U.S. economy is expected to continue improving in 2024 on expectations that it will avoid recession and prices and borrowing costs will ease, according to the ISM’s twice-annual survey released on Dec. 15. At the time, Nieves said the service sector’s projection of a 0.8% increase in employment is “slightly concerning” after a 0.3% rise since May and a 1.9% gain for all of 2023.
Since then, Nieves said, the only major additional information that has emerged is the prospect for interest rate cuts by the Federal Reserve, which left its policy rate unchanged for the third straight meeting on Dec. 12-13. The real-estate and leasing industries are expected to benefit from lower borrowing costs as they were the first ones to suffer from rapid Fed tightening in 2022.
Of the four sub-indexes that directly factor into the services PMI, growth in business activity continued, new orders slowed, employment conditions plunged to the weakest in more than three years after improving slightly in the prior month, and supply deliveries were faster for the third straight month on improved supply chains.
The business activity index rose 1.5 percentage points to 56.6 in December after rising 1.0 point to 55.1 in November, plunging 4.7 points to a five-month low of 54.1 in October and rising 1.5 points to 58.8 in September. It jumped 7.7 points to a five-month high of 59.2 in June 2023 to recover most of its declines seen in the previous four months. The readings of 51.5 in May and 52.0 in April 2023 were three-year lows.
The new orders index fell 2.7 points to 52.8 in December after being unchanged at 55.5 in November, rising 3.7 points to 55.5 in October and slumping 5.7 points to a nine-month low of 51.8 in September. The index indicated expansion for the 12th consecutive month after contracting in December 2022 for the first time since May 2020 (41.3).
The employment index slumped 7.4 points to 43.3 in December, hitting the lowest since 43.0 in July 2020, after rising 0.5 point to 50.7 in November, falling 3.2 points to 50.2 in October, easing 1.3 points to 53.4 in September and jumping 4.0 points in August to 54.7 (the highest since 56.1 in November 2021). It slipped below the key 50 line for the first time in five months in May 2023 to 49.2, the lowest since 49.2 in October 2022.
The supplier deliveries index — the only ISM index that is inversed – edged down 0.1 point to 49.5 in December after rising 2.1 points to 49.6 in November, dipping 2.9 points to 47.5 in October and 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). The index remained in contraction territory for the third consecutive month, indicating that supplier delivery performance was ‘faster’ in contrast to the ‘slowing’ status in September. In the last 11 months, the average reading of 48.3 (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 inventories index fell 5.8 points to 49.6 in December after rebounding 5.9 points to 55.4 in November, slumping 4.7 points to 49.5 in October (the first contraction in six months) and falling 3.5 points to 54.2 in September. The latest decline followed a rise in November, which was due to a seasonal buildup for the holiday season and higher purchases of personal protective equipment at the start of the flu season.
The prices paid index fell 0.9 point to 57.4 in December, indicating a continued increase but at a slower pace, after edging down 0.3 point to 58.3 in November and dipping 0.3 point to 58.6 in October. It fell 2.1 points to 54.1 in June 2023, hitting 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 index for backlog orders rose 0.3 points to 49.4 in December after falling 1.8 points to 49.1 in November, rising 2.3 points to 50.9 in October and gaining 6.8 points to 48.6 in September. It rose 8.2 points to 52.1 in July 2023 to be in expansion territory for the first time in five months. It fell 8.8 points to 40.9 in May 2023, hitting the lowest since 40.0 in May 2009.
The new export orders index fell 3.2 points to 50.4 in December after rising 4.8 points to 53.6 in November, plunging into contraction with a 14.9-point drop to 48.8 in October and rising 1.6 points to 63.7 in September.