–ISM Services Index at 51.4 Vs. 52.6 in February, Below 12-Month Average of 52.5
–ISM Prices Paid Index Dips to 4-Year Low but Above 50 for Nearly 7 Years
–ISM’s Nieves: Prices Paid Index Unlikely to Fall Below Neutral Line of 50 Any Time Soon
–Nieves: Inflation Stabilizing but Remains a Concern Among Firms
–Nieves: Fed Rate Cuts May be Delayed by Mixed Employment Conditions, Lingering Price Pressures
By Max Sato
(MaceNews) – Business activity in the U.S. services sector was in positive territory for the 15th straight month in March but the key index unexpectedly fell on slower growth in new orders and a contraction in employment after posting a slight pullback in February on mixed employment and concerns over inflation, according to the latest survey by the Institute for Supply Management (ISM) released Wednesday.
A senior ISM official told reporters that firms are still concerned about upward price pressures, and that he does not expect the prices paid index to contract or the Federal Reserve to start cutting rates any time soon.
The ISM index, which shows the directional change of economic activity, fell 1.2 percentage points to 51.4 after dipping 0.8 point to 52.6 in February and rising 2.9 points to 53.4 in January. The index came in below the median economist forecast of 52.7 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 67.1 reached in November 2021.
“The decrease in the rate of growth in March and the decline in the composite index is a result of slower new orders growth, faster supplier deliveries and a contraction in employment,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. On the upside, respondents in the March survey indicated continuing improvement in logistics and the supply chain, he said.
“Employment challenges remain a combination of difficulties in backfilling positions and/or controlling labor expenses,” Nieves said. “The prices index reflected its lowest reading since March 2020, when the index registered 50.4 percent; however, respondents indicated that even with some prices stabilizing, inflation is still a concern.”
Employment conditions have been mixed in the services sector as some firms in the construction and food service industries are still struggling to backfill positions while others are holding at post-peak employment levels.
On the performance of the services sector, Nieves told reporters, “I think overall we will continue to see this trend of incremental growth and hopefully the employment picture does pick up a little bit here.”
Asked about the impact of employment being a mixed bag and inflationary pressures continuing to linger, he said, “Indications are … rate cuts may be delayed.”
“I don’t anticipate us seeing prices continue to go down,” Nieves said. “We could still see pricing continue to increase. I don’t expect (the prices paid index) to contract any time soon.” There is volatility in the prices of fuels and other commodities while electrical components and equipment have been in short supply over months, he noted.
The pricing cycle in the services sector takes longer to change as the costs of tangible goods are absorbed over time in the supply chain, compared to a faster shift in the costs for the manufacturing sector, Nieves said.
Of the four sub-indexes that directly factor into the services PMI, the business activity index edged up 0.2 percentage point to a six-month high of 57.4 in March after rising 1.4 points to 57.2 in February. It is below 59.2 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 fell 1.7 points to a three-month low of 54.4 in March after rising 1.1 points to a six-month high of 56.1 in February. It still indicates expansion for the 15th consecutive month.
The employment index showed contraction for the fourth time in 12 months. It rose 0.5 point to 48.5 in March after slipping 2.5 points to 48.0 in February and surging 6.7 points to 50.5 in January. “Employment continues to be the mixed bag that it has been over the last several months,” Nieves said. Some industries are still having difficulties in backfilling positions while others are being cautious about overstaffing or even staffing, he said. “Labor is still tight across the country for skilled trades positions,” a construction company told the ISM.
The supplier deliveries index — the only ISM index that is inversed — fell 3.5 points to a record low of 45.4 in March after dipping 3.5 points to 48.9 in February (the fastest deliveries since July 1997, when the ISM began tracking them). The index shows contraction for the second month in a row, indicating that supplier delivery performance was faster after being slower in January, when the index jumped to a 14-month high of 52.4. In the last 12 months, the average reading of 48.7 reflects the fastest supplier delivery performance since December 2022, when the index stood at 48.5. A reading of below 50 indicates faster deliveries, which means either supply chains have recovered or customer demand has slowed, or a combination of both.
“The Red Sea turmoil is still not a notable challenge on supply for our sector, but we’re watching carefully for disruption risk,” a firm from the accommodation and food services category told the ISM. “Also, the unrest in Haiti carries potential risk for the garment industry.”
In January, 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.
In other details, the inventories index was in contraction for the fourth straight month. It fell 1.5 points to 45.6 in March after falling 2.0 points to 47.1, hitting the lowest since 45.1 in December 2022. “Respondents are indicating not only it is the consensus that they are looking to manage their inventories and cash liquidity, (but) there have been initiatives in place for inventory reductions,” Nieves said.
The prices paid index fell 5.2 points to a four-year low of 53.4 after falling 5.4 points to 58.6 in February and soaring 7.3 points to an 11-month high of 64.0 in January, when it caused concerns about sticky inflation. The index is now at the lowest since 50.4 in March 2020 and well below its record high of 83.8 hit in March 2022. But it has been above the neutral line of 50 for nearly seven years since 49.6 in May 2017. A firm in the health care and social assistance industry pointed to “continued inflationary pressure across multiple clinical device categories as contracts expire or are renewed.”
The index for backlog orders, which is tied directly to efficiency in the upstream of supply chains, fell 5.5 points to 44.8 in March after falling 1.1 points to 50.3 in February. It is still above 40.9 in May 2023, which is the lowest since 46.4 in May 2009.
The new export orders index rose 1.1 points to 52.7 in March after slipping 4.5 points to 51.6 in February and rising 5.7 points to a four-month high of 56.1 in January.