–ISM Services Index at 53.4 Vs. 12-Month Low of Revised 50.5 in December
–ISM Supply Deliveries Slower for 1st time in 4 Months due to Shipping Delays
–ISM’s Nieves: Congestion at Panama Canal More Serious Than Impact of Red Sea Conflict
–Nieves: Higher Costs Concerning, Keeping Fed Cautious about Lowering Interest Rates
By Max Sato
(MaceNews) – Business activity in the U.S. services sector stayed in positive territory for the 13th straight month in January, with the key index rebounding more than expected following an unexpected slump the previous month, thanks to higher new orders backed by funding for the new fiscal year and resumed hiring after the holiday season, according to the latest survey by the Institute for Supply Management (ISM) released Monday.
But the January report also showed respondents remained concerned about the economy amid lingering cost pressures and geopolitical risks.
The main index, which shows the directional change of economic activity, rose 2.9 percentage points to a four-month high of 53.4 in January after falling 2.0 points to a 12-month low of 50.5 (revised down from 50.6) in December. The ISM’s annual revisions to seasonal factors resulted in changes to recent numbers.
The index came in above the median economist forecast of 52.1 and its 12-month average of 52.5. It is well above the recent lows of 41.7 hit in April 2020 and 40.1 in March 2009, the latter of which is the lowest since the inception of the Services PMI in 2008. But it also remains well below the record high of a revised 67.1 reached in November 2021.
“The overall growth rate increase in January is attributable to faster growth of the new orders, employment and supplier deliveries indexes,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement, noting that a supply deliveries index above 50 means slower deliveries. “The majority of respondents indicate that business is steady.”
“They are optimistic about the economy due to the potential impact of interest rate cuts; however, they are cautious due to inflation, associated cost pressures and ongoing geopolitical conflicts,” he said.
Supply deliveries were delayed by bad weather in some U.S. regions, the impact of attacks in the Red Sea, which prompted shipping firms to avoid the Suez Canal in Egypt, as well as congestion at the drought-hit Panama Canal, a key route for cargo going between Asia and the U.S. East Coast.
“Definitely the conflict in the Red Sea is having an impact,” Nieves told reporters. “However, I believe that the Panama Canal situation is even worse because the level of traffic going through there … is probably one third of where it was.”
Shipping delays and elevated food prices are also exerting upward pressures on overall costs for service providers, which could keep service prices sticky in the U.S. CPI data and thus leaving Federal Reserve policymakers cautious about lowering interest rates from the current restrictive level.
Asked if the jump in the ISM prices index in January is concerning, Nieves replied, “I believe so. I think that’s what hindering the FOMC from … the path of multiple interest rate cuts.”
Some firms still find it hard to recruit workers while others see high turnover, Nieves said. Last month, he predicted that hiring activity by service providers should resume in mid-January after a seasonal slowdown as they tend to secure workers before the busy holiday season.
Of the four sub-indexes that directly factor into the services PMI, growth in business activity was steady, new orders rebounded, employment conditions surged to recover nearly all of the sharp drop in the prior month, and supply deliveries slowed for the first time in fourths.
The business activity index was unchanged at 55.8 in January after rising 0.9 point in December. It is much lower than 59.2 seen at the start of 2023 but is still above 52.9 in May and 53.3 in April 2023, which were three-year lows.
The new orders index rose 2.2 points to 55.0 in January after falling 2.0 points to 52.8 in December. The index indicated expansion for the 13th consecutive month. Respondents pointed to a new slew of projects in the new year, an uptick in work as people return from vacation and increased spending for capital projects.
The employment index jumped 6.7 points to 50.5 in January after slumping 6.8 points to 43.8 in December, which was the lowest since 43.0 in July 2020 and indicated contraction in labor conditions for the first time in seven months.
The supplier deliveries index — the only ISM index that is inversed — rose 2.9 points to 52.4 in January after slipping 0.1 point to 49.5 in December. The index is in expansion territory for the first time in four months, indicating that supplier delivery performance was ‘slower.’ In the last 12 months, the average reading of 48.6 (with a low of 45.8 in March) reflects the fastest supplier delivery performance since December 2022, when the index stood at 48.5. 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 was in contraction for two months in a row, edging down0.5 point to a nine-month low of 49.1 in January after plunging 5.8 points to 49.6 in December and following a seasonal buildup for the holiday season and higher purchases of personal protective equipment at the start of the flu season in November, when the index jumped 5.9 points to 55.4.
The prices paid index surged 7.3 points to an 11-month high of 64.0 in January after dipping 0.9 point to 56.7 in December, indicating higher cost pressures. It fell 2.4 points to 54.8 in June 2023, hitting the lowest since 50.4 in March 2020. The index remains well below its record high of 83.8 hit in March 2022. Nieves said he wants to see the index fall back to the 50s range from 60s.
The index for backlog orders rose 2.0 points to 51.4 in January after rising 0.3 points to 49.4 in December. It fell 8.8 points to 40.9 in May 2023, hitting the lowest since 46.4 in May 2009.
The new export orders index rose 5.7 points to a four-month high of 56.1 in January after falling 3.2 points to 50.4 in December.