Report On Business® Roundup: May Services PMI®
With executives and investors aggressively anticipating the next monetary policy move from the U.S. Federal Reserve (Fed), a “sometimes bad news is good news” mindset has been pervasive around the release of economic data, including the ISM® Report On Business®.
The early days of May seemed to bring a sentiment shift — that bad news might be just that. After the Manufacturing PMI® on Monday revealed another month of sector contraction, a senior economist wrote, “In recent months, investors have cheered weaker-than-estimated data based on expectations that it could accelerate the start of the Fed’s policy loosening. Investors are now reacting to soft data with fear.”
Adp employment numbers were weak so market is up. Bad news is good. But sometimes bad news is bad. Sometimes good news is good. And sometimes good news is bad. It’s hard to keep up.
— Steven Eisman (@EismanSteven) June 5, 2024
Through that lens, the response to a better-than-expected Services PMI® of 53.8 percent in May, a quick reversal after a month of contraction, was surprisingly muted. Institute for Supply Management® Business Survey Committee members continued to express the criticality of interest-rate clarity on their jobs — more on that later. But markets seemed happy to simply take the “W” on the news, continuing at or near record highs and proceeding like a loosening of Fed policy is no longer an if, even if the when is uncertain.
“Everyone got excited last month with the contraction, and we said to hold on and wait and see how this trends over a period of three or four months,” 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 Wednesday. “What we are again seeing is the resiliency of the services sector.”
The buoyant Services PMI® data was balanced somewhat by a monthly private payrolls report on Wednesday by ADP and the Stanford Digital Economy Lab that revealed 152,000 jobs added in May, which failed to meet analysts’ expectations. With the Services Employment Index (47.1 percent) contracting, though at a slower rate than in April, all eyes will be on the federal jobs report released on Friday.
Employment was the only one of the four subindexes that directly impact the PMI® calculation — Business Activity, New Orders and Supplier Deliveries are the others — to contract in May. The Business Activity Index led the charge with a 10.3-percentage point improvement to 61.2 percent, the highest reading since November 2022.
The New Orders Index ticked up to 54.1 percent, helped by a 13.9-percent increase in the New Export Orders Index, which reached 61.8 percent. The Supplier Deliveries Index moved into expansion (or “slowing”) territory at 52.7 percent, reflecting longer lead times that are typical as demand increases.
Meanwhile, the Prices Index was down 1.1 percentage points to 58.1 percent, indicating a slower rate of commodities inflation. That index is closely watched by the Fed. Services Business Survey Committee members hope their comments are given similar weight; they have been advocating for rate cuts for months, and in May, their ISM Manufacturing counterparts became more overt in such sentiment.
ISM Services jumps back to 53.8
— Andreas Steno Larsen (@AndreasSteno) June 5, 2024
Time to put that recession chatter to bed for a few months again? pic.twitter.com/vd1Kvrqfpb
“Higher interest rates are reducing capital investment and slowing down major facility upgrades,” wrote a respondent in Agriculture, Forestry, Fishing & Hunting. That was one of three rate-related comments in the Services ISM® Report On Business® for May; Nieves said he could have included several more.
“There were many more comments from respondents this month than what I’ve seen in previous months,” Nieves said. “The various indexes readings were good news, but panelists believe that it would be a much better situation and less of an impediment for business growth and top-line revenue if they didn’t have the issues of inflation and high interest rates.”
The May report was Nieves’ last as Services Business Committee Chair; he has served since the first public release of the Services PMI® data in 2008. He will be succeeded by Steve Miller, CPSM, chief commercial officer at DeepLogica, a Shelton, Connecticut-based proprietary artificial intelligence (AI) platform.
Nieves departs as fervent of a believer in the ISM® Report On Business® as when he started as Chair. “When you look at it historically and how it maps against (other data) over time, it’s as close as anything else out there to a real-time read,” he said. “In fact, it’s better because of the composition of the survey respondents.
“This is the original PMI®. It’s what everyone else tries to emulate.”
The Report On Business® roundup:
Bloomberg: U.S. Service Providers Chalk Up Strongest Growth in Nine Months. “While the manufacturing survey showed a notable pullback in bookings, orders placed with service providers expanded at faster pace in May. Some 27.9% of service providers indicated an increase in orders, the highest share since August. That indicates steady demand in the largest part of the economy that continues to contribute to lingering inflationary pressures.”
CNBC: ISM Services PMI® Widely Beats Expectations, Best Level Since August ’23. Solid with a capital ‘S’: 53.8 percent for the headline ISM Services index,” analyst Rick Santelli said. “Why is this a big number? Because of what was in the rear-view mirror: 49.4 percent (in April), the first time in 15 months under 50, since December 2022. So, a nice reversal. … To summarize, it seems the (Prices Index) number and the PMI® being strong, those combined are not giving much back on (interest) rates in this particular data set.”
Investor’s Business Daily: ISM Services Index Jumps But S&P 500 Rises On Fed Rate-Cut Outlook. “The combination of data points looks like Goldilocks. The improved service-sector growth came despite another negative read for the ISM Services (Employment Index), which reinforced the softer ADP data. Bottom line: Markets don’t need to be overly worried about growth slowing too abruptly — especially if the Fed follows through with rate cuts.”
Mace News: Services Sector Swings Back into Growth in May from April’s Brief Contraction but More Firms Concerned About High Interest Rates. “Nieves told reporters that he expects the services sector to show ‘incremental growth’ into the summer due to the holiday season and vacation time. But he also said more firms are expressing concerns about high interest rates that is preventing new investment in equipment.”
Wednesday's ISM services print now arguably more important than payrolls given the reaction to the manufacturing report.
— David Scutt (@Scutty) June 3, 2024
US data surprises are negative while GDPNow shows growth rolling over. If services confirm that trend you won't need the laggy payrolls report for signal.
MarketWatch: U.S. Services Sector Bounces Back in May, ISM Says. “Economists polled by The Wall Street Journal had expected the ISM index to inch higher to 50.7 percent. … Economists didn’t expect the contraction in the service sector to last and would probably have been concerned if it did. The data show that the economy continues to expand, albeit at a slower pace than last winter.”
Reuters: U.S. Services Sector Activity Rebounds While Private Payrolls Growth Slows. “The stronger-than-expected services reading stood in contrast to the ISM report on the manufacturing sector that was released on Monday. It showed factory activity contracted for the second straight month in May. Indeed, incoming data over the last month has generally failed to meet economists’ projections, adding to evidence that the Fed’s interest rate increases … are finally weighing on an economy that has proven stubbornly resilient.”
In case you missed Monday’s Report On Business® Roundup on the release of the May Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Friday. 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/Lacheev)