Report On Business® Roundup: April Services PMI®
Given the U.S. economic environment of the last two years — particularly in the area of federal monetary policy — the “sometimes bad news is good news” mindset elevated the Dow Jones Industrial Average, Nasdaq and the S&P 500 markets on Friday.
The Services ISM® Report On Business® obliged these traders and investors with its composite index reading of 49.4 percent in April, a decrease of 2 percentage points compared to the previous month and the first in contraction territory since December 2022. Combined with a modest federal jobs number of 175,000 positions added in April, the lowest number in six months, stock markets rose and bond yields dropped on the prospect of a cooling economy that raised hopes that the U.S. Federal Reserve will cut interest rates this year.
“I believe that, looking at the variables here, one month may not be a trend,” Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Imstitute for Supply Management® Services Business Survey Committee, told a conference call of reporters on Friday. “I’m not trying to be the eternal optimist, but I think there’s also no reason to get overly excited that it’s below the 50-percent baseline.”
The Services PMI® was characterized as a surprise in some reports (and it came in below analysts’ expectations), but the index’s moving closer to 50 percent in recent months — as well as ISM’s Semiannual Economic Forecast in December projecting a pullback in the services sector in the first half of 2024 — suggested a contraction was possible.
And recent history affirms Nieves’ caution. The last PMI® contraction in December 2022 was unexpected, but ultimately a one-off. In January 2023, it returned to expansion and stayed there for 15 months. Nieves said dynamics with inflation and geopolitics are different now, so there’s no guarantee of a one-month turnaround.
Speaking of inflation, the Prices Index — like its ISM Manufacturing counterpart — had a healthy increase in April, up 5.8 percentage points to 59.2 percent. “Availability and demand influence pricing,” Nieves said. “There aren’t many commodities in short supply. And if you look at what’s up in price on the list, it’s fuel, and overland trucking is so vital to the services sector. And there are geopolitical concerns.”
Fifteen commodities were up in price in April, a far cry from the peak of the coronavirus pandemic, when the list was so long it could not fit on the Report On Business® page that appears in Inside Supply Management®. Still, some of those commodities are vital to services, including labor, which was listed as up in price for the 41st consecutive month.
This is incorrect.
— Marko Bjegovic (@MBjegovic) May 3, 2024
There is not a single hint of stagflation in this report.
Inflation part is non-existent and ISM Services Prices are still subdued in historical terms.
The only flation here is disin(potentially de)flation.
Added Nieves, “It wasn’t that long ago that we considered it a milestone when the Prices Index got below 60 percent. So, we’re not at that level, but the rate of increases was definitely faster than it was a month ago.”
The biggest hit to the PMI® calculation came from the Business Activity Index, which decreased 6.5 percentage points to 50.9 percent, a four-year low. However, other subindexes showed resiliency, which is encouraging heading into the summer months, when demand typically picks up.
The New Orders Index also decreased, registering 52.2 percent, a good but not great reading that at least indicates product in the pipeline. The Inventories Index vaulted into expansion at 53.7 percent, an 8.1-percentage point gain, as Business Survey Committee respondents indicated their companies were boosting stocks ahead of summer demand.
The Backlog Of Orders Index also expanded, up 6.1 percentage points to 51.1 percent. That could be a product of increased demand or supply chain issues, and Nieves said survey respondents noted such disruptions as the Red Sea turmoil, Panama Canal drought and Baltimore bridge collapse.
Finally, with the focus on the federal jobs report, the Employment Index decreased to 45.9 percent. Hiring figures to pick up as summer approaches, but the challenges remain the same, Nieves said.
“Respondents keep telling us that they have attrition in their workforces, and they’re not backfilling those positions,” he said. “And certain industries are still having difficulty just finding workers. That mixture of those two things has been ongoing for several months.”
ISM Services Prices came in hot as expected. Contraction level for headline print and employment metric continuing to decline.
— Kevin Green (KG), MSDA (@KGBULLANDBEAR) May 3, 2024
The Report On Business® roundup:
Bloomberg: U.S. Services Index Shrinks as Activity Gauge Hits Four-Year Low. “The (Business Activity Index) had been steadily picking up over the past six months. If weaker readings persist in coming months, it could raise concerns about a broader slowdown in economic growth because the service sector is the largest part of the economy.”
CNBC: Services Index Enters Contraction for the First Time in More Than a Year. “If we look at the headline, it dipped back below 50 percent. We haven’t been under 50 since December 2022,” analyst Rick Santelli said. He added, “If we look at the (Employment Index) after we just had the (federal jobs) report, it comes in lighter at 45.9 percent, kind of in correlation with the (federal) number.”
Mace News: U.S. Services Sector Unexpectedly Contracts in April After 15 Months of Growth, Hit by Cooling Demand, Mixed Employment, Elevated Costs. “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.”
MarketWatch: ISM Service-Sector Gauge Weakens Sharply in April. “The service sector has been the bedrock for the economy in the face of higher interest rates. The surprising decline could be the tip of the iceberg of a slowdown. It might build the case for a Federal Reserve rate cut on bad news grounds.”
Did you know about ISM services in advance? In the words of the poet (Huey Lewis) sometimes bad IS bad.
— Darin C. Brown (@DarinCBrown) May 3, 2024
Reuters: U.S. Service Sector Contracts in April; Price Pressures Reaccelerate. “Economists polled by Reuters had forecast the index edging up to 52 percent in April. The slowdown in economic growth comes after 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022 designed to quell elevated inflation. The U.S. central bank had been expected to start cutting interest rates this year, but doubts now persist amid a stalling in progress on bringing inflation back down to its 2-percent goal.”
In case you missed Wednesday’s Report On Business® Roundup on the release of the February Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Tuesday. For the most up-to-date content on the three indexes under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.
(Photo credit: Getty Images/Alina555)