–ISM Services Index at 49.4 Vs. 51.4 in March; Median Forecast 52.0
–Business Activity Plunges to Nearly 4-Year Low, New Orders at 16-Month Low
–ISM Prices Paid Index Jumps to 4-Month High After Falling to 4-Year Low in March
–Employment Index Below 50 Neutral Line for 3rd Straight Month
–ISM’s Nieves: One Month Contraction Not a Trend, New Orders Still Growing
By Max Sato
(MaceNews) – Business activity in the U.S. services sector unexpectedly slipped back into slight contraction in April after 15 months of growth, hit by sluggish demand and mixed but cooling employment amid lingering concerns over inflation and geopolitical risks, according to the latest survey by the Institute for Supply Management (ISM) released Friday.
The ISM index, which shows the directional change of economic activity, slumped 2.0 percentage points to a 16-month low of 49.4 in April for a third straight monthly drop after falling 1.2 points to 51.4 in March. The index came in weaker than the median economist forecast of 52.0 and its 12-month average of 52.2. The last contraction was seen in December 2022 when the index plunged to 49.0.
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 decline in the composite index in April is a result of lower business activity, slower new orders growth, faster supplier deliveries and the continued contraction in employment,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “Survey respondents indicated that overall business is generally slowing, with rates varying by company and industry.
“Employment challenges continue to be primarily due to difficulties in backfilling positions and/or controlling labor expenses,” he said. “The majority of respondents indicate that inflation and geopolitical issues remain concerns.”
Nieves told reporters that one month of contraction is “not a trend” and stressed that new orders are still growing, although he didn’t rule out another month of contraction.
“There are several comments in here (the April report) as far as saying that they believe there will be picking up in business in the next few months and the same thing with hiring,” he said.
The mixed employment environment, in which some firms are still struggling to hire workers, “is a big anchor” for the services sector, Nieves said, predicting, “I think if the employment picture improves going forward, we might see the uptick we are looking for to back us back to the 50 baseline.”
Asked about the outlook for Federal Reserve policy in light of weaker-than-expected results of the ISM survey and U.S. jobs data for April, Nieves said, “Indications are that by the fall, they might look at rate cuts if we can get some stabilization on the pricing front.”
Several firms voiced concerns about inflation as rising fuel prices are pushing up transportation costs. A firm in the health care and social assistance industry said it “continue[s] to be challenged with inflationary pressure through labor and service cost increases, but we are working hard at finding utilization savings to offset where possible.”
“We are still experiencing supply chain challenges with increased costs of raw materials, particularly chemicals and their containers, as well as higher U.S. and overseas freight transportation costs,” a firm in the management of companies and support services industry said.
A firm in the accommodation and food services category noted “steady improvement” toward lower costs in food and beverages but added that avian bird flu may affect pricing moving forward. “Already seeing increases in chicken and eggs,” it said. “In the technology space, prices are not decreasing but holding steady.”
Of the four sub-indexes that directly factor into the services PMI, the business activity index plunged 6.5 percentage points to a nearly four-year low of 50.9 in April after edging up 0.2 point to a six-month high of 57.4 in March. It is now below 52.9 recorded in May and 53.3 in April 2023 and the lowest since 41.2 in May 2020, when the pandemic caused a global slump.
The new orders index fell 2.2 points to a 16-month low of 52.2 after dipping 1.7 points to 54.4 in March and rising 1.1 points to a six-month high of 56.1 in February. It still indicates expansion for the 16th consecutive month.
The employment index showed contraction for the fifth time in 12 months. It fell 2.6 points to a four-month low of 45.9 after rising 0.5 point to 48.5 in March, slipping 2.5 points to 48.0 in February and surging 6.7 points to 50.5 in January.
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 showed growth after four months of contraction. It jumped 8.1 points to 53.7 after falling 1.5 points to 45.6 in March, which was the lowest since 45.1 in December 2022.
The index for backlog orders, which is tied directly to efficiency in the upstream of supply chains, rose 6.3 points to 51.1 in April, back in growth territory, after falling 5.5 points to 44.8 in March, which was the first contraction in three months. It is still above 40.9 in May 2023, which is the lowest since 46.4 in May 2009.
The new export orders index slipped 4.8 points to a six-month low of 47.9 after rising 1.1 points to 52.7 in March and posting its first contraction since October 2023, when it plunged 14.9 points to 48.8.