Report On Business® Roundup: February Services PMI®
A comment from an Institute for Supply Management® (ISM®) Services Business Survey Committee respondent in the Public Administration industry illustrates how the landscape remains somewhat “unsettled,” even four years after the start of the coronavirus pandemic.
“Inflationary fears persist, yet some things are settling down,” the respondent wrote in the February Services ISM® Report On Business®. “High demand for services, although inquiries from contractors for opportunities seem to be only inching upward. Layoffs in many large industries, but many businesses are desperate for workers.”
The comment concludes: “Lots of contradictions.”
In spite of economic challenges and conditions that sometimes seem diametrically opposed, the Services PMI® data for February revealed a sector that has remained resilient, while manufacturing continues an arduous climb out of contraction. The composite index reading of 52.6 percent in February was below analysts’ expectations but indicated services sector growth for the 44th time in the last 45 months.
“The report continues to reflect steady incremental growth of the services sector, which is what our respondents indicated in December (in ISM’s Semiannual Economic Forecast),” Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the ISM Services Business Survey Committee, told a conference call of reporters on Tuesday.
The PMI® was 0.8 percentage point lower than January’s reading, and — in one of the most user-friendly aspects of the ISM® Report On Business® — a quick glance at the subindex data reveals why. Among the four subindexes that directly factor into the PMI®, two (Business Activity and New Orders) indicated solid growth, but the other two (Employment and Supplier Deliveries) fell into contraction territory.
The Business Activity (57.2 percent) and New Orders (56.1 percent) grew month over month, suggesting an active pipeline of current and future commerce. The Supplier Deliveries Index (48.9 percent, down from 52.4 percent in January) indicated faster performance, despite some respondents’ concerns over potential disruptions in the Red Sea and at the Panama Canal, and the Employment Index (48 percent, down from 50.5 percent) reflected companies’ struggles in finding qualified workers, a problem that predates COVID-19.
Services #ISMPMI #Employment Index dive: February reading of 48% is second contraction in three months. Fewer companies adding #jobs (13.5%) compared to January (16.2%), with little change in those cutting staff (20.6% in February, up from 20.5%) https://t.co/LonHoKFkhJ #economy
— Dan Zeiger (@ZeigerDan) March 5, 2024
“Some technology companies continue to right-size their employment levels, whereas other companies or industries are having difficulty on the backfill,” Nieves said. “Construction (although that industry reported employment growth in February) has been consistently having difficulty finding workers, and Real Estate, Rental & Leasing has been not as strong as in the past, especially on the commercial side.
“So, it remains a mixed bag, and the challenges many companies had finding workers helped pull down the composite index.”
While the Employment Index figure is a prelude to the federal jobs report on Friday, the Prices Index was closely watched because U.S. Federal Reserve (Fed) chair Jerome Powell is scheduled to provide Congressional testimony on Wednesday and Thursday.
The Prices Index registered 58.6 percent in February, a decrease of 5.4 percentage points compared to January. While the Fed will note that reading as it weighs interest rate cuts, Powell is unlikely to hint at the central bank’s direction in front of Congress.
“Wall Street and Washington are going to want to know when the Fed is going to cut rates and by how much, because it will affect what you can earn and whether you can get elected,” Bloomberg analyst Michael McKee said while discussing the Services PMI® numbers on Tuesday. “(But Powell) will likely just reiterate that the Fed has more work to do on inflation and will be watching the data.”
Amid continuing inflation worries, the Prices Index reading is not out of line with historical trends; for example, it consistently exceeded 60 percent in 2018, as the trade war heated up.
“Prices are still growing — not at as fast of a rate as in in the past, but it’s still been 81 months or almost seven years of continued price increases,” said Nieves, who noted that the list of commodities up in price is much shorter than it was for much of the pandemic, but traditional services sector cost drivers as fuel and labor remain.
And in recent months, food has been such a nagging expensive commodity. “That’s something all of us feel, from (supply managers) to anyone who goes to the grocery store or restaurant,” Nieves said.
ISM services has fallen in seven of the past 10 years in Feb. Not significant but noteworthy.
— David Scutt (@Scutty) March 5, 2024
The Report On Business® roundup:
Bloomberg: U.S. Services Growth Cools While Orders, Business Activity Pick Up. “The Business Activity Index, which parallels ISM’s (Manufacturing Production Index), climbed to a five-month high of 57.2 percentage. While the measure of manufacturing production shrank last month, purchasing managers remained optimistic about the direction of the sector.”
ING Think: U.S. Services Sector is Growing, But Job Concerns are Mounting. “The market has seemingly taken this report as a signal of weakness, with Treasury yields falling further and Federal Reserve rate cut expectations rising modestly. Nonetheless, it can also be spun as showing quite a nice combination of decent activity, not-so-hot prices and businesses looking at perhaps right-sizing their workforce after a period of firm hiring.”
Mace News: Services Sector Expands for 14th Straight Month in February but Main Index Dips on Mixed Employment Picture, Supplier Deliveries. “Employment conditions remain 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, Nieves told reporters. Nieves also said high volume service providers for hotel banquets and office settings are typically looking for contract workers rather than regular hires amid caution over the business outlook.”
Bonds liked that ISM services number. Delivery times and prices eased. Taken at face value, the growth in new orders and business activity with employment running below 50, implies an improvement in productivity. That keeps unit labor costs in check. pic.twitter.com/DhZGbf0T5J
— RenMac: Renaissance Macro Research (@RenMacLLC) March 5, 2024
MarketWatch: ISM Service Sector Gauge Stumbles in February But Stays in Expansion Territory. “The service sector has been an important ingredient in keeping the economy surprisingly strong over the past six months. The pace hasn’t been strong but it’s been steady. … Higher service inflation is one reason the Federal Reserve is being cautious about cutting interest rates.”
Reuters: U.S. Services Sector Slows in February; Inflation Moderating. “Despite the weakness in employment, comments from services businesses in the (ISM) survey on Tuesday were generally upbeat, and suggested labor shortages remained a constraint for some. There were also no signs that inflation was picking up after a jump in prices at the start of the year, welcome news for Federal Reserve officials.”
In case you missed Friday’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 Thursday. 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/ArtistGND Photography)