A surprise reading on prices, a continuing mixed bag on employment and slowing new orders growth were among the data points that made the Services ISM® Report On Business® for March perhaps “the week’s most relevant market mover” for much of the economic world.
The Services PMI® of 51.2 percent unveiled on Wednesday was below analysts’ expectations, with subindex data rattling Treasurys and bond traders and — along with ISM’s Manufacturing report on Monday — fueling more speculation about how the U.S. Federal Reserve will respond.
“It certainly seems the market has an opinion these days, especially given the recent direction” of the Report On Business® and other economic data, CNBC analyst Rick Santelli said after the Services PMI® was released. He added, “Here’s the shocker: prices paid. Watch these Treasury yields go down as (the Prices Index) reads 59.5 percent, the weakest reading since May 2020.”
The Prices Index figure — which some economists watch as a harbinger of consumer spending inflation — suggested a fever break after 29 consecutive months of readings north of 60 percent, including 10 above 80 percent and an all-time high of 84.5 percent in December 2021. However, there could be a caveat: The Manufacturing Prices Index returned to “decreasing” territory in March, but ISM Business Survey Committee respondents noted still-elevated prices on some commodities and an impasse between buyers and sellers.
There’s a similar “good news, bad news” dynamic in the Services report, as 17 commodities were reported as up in price, with just four down. While diesel fuel and fuel, inflation drivers in the sector, were down in price, fuel was also reported as up in price. (Due to volatility, a commodity sometimes makes both lists.) Importantly, the most precious services commodity — labor — remained a cost pressure.
“Labor is definitely the largest factor because of wage pressure,” Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® Services Business Survey Committee, told a conference call of reporters on Wednesday. “That pressure is a big reason that pricing continues to increase over month in services.”
could be. important bit is ISM services prices back to 2018 level... which suggests prices might still be "too high" for the Fed, but moderating a lot— Ira Jersey, US Fixed Income (@IraFJersey) April 5, 2023
Nieves noted that labor costs haven’t impacted profit margins of some respondents’ companies because they have been able pass those increases along to customers. And while slower services growth and continuing manufacturing contraction in April has led to speculation of an interest-rate pivot, it’s unclear if price-index levels have become palatable for the Fed.
“Hopefully, we won’t see the interest rates continue to go up as strongly,” Nieves said. “Those (increases) have affected Real Estate, Rental & Leasing (RER&L) significantly, and the pullback in that industry has affected and the entire picture for the services sector.”
That pullback was evident in the New Orders Index, which registered 52.2 percent in March, a decrease of 10.4 percentage points compared to the previous month. Among the four industries reporting a decrease in new orders, RER&L — the services sectors largest, making up 13.7% of its gross domestic product (GDP) — was listed first.
The federal jobs report on Friday figures to be the next market mover, and the Employment Index remained in expansion at 51.3 percent, although that is down 2.7 percentage points from February. The labor waters still seem lukewarm — many companies want to hire but struggle to find qualified candidates, and for others, “layoffs will continue,” as a Business Survey Committee respondent in Professional, Scientific & Technical Services wrote.
Nieves noted that although staff reductions continue in such areas as technology, 11 of the 18 services industries reported employment growth in March. “When you look at the Employment Index, anything above 50 is positive,” he said. “This is the second month it’s been above 50, and before that it bounced back and forth for a while. If we can get (some consistency), that would be key because the services sector is so reliant on labor.”
In other subindex news, the Backlog of Orders (48.5 percent) and Imports (43.6 percent) indexes fell into contraction, but Nieves said he is hopeful that both will rebound as capacity and logistics performance improves and Chinese production returns fully online after Lunar New Year and Beijing’s loosening of COVID-19 restrictions.
“We’ll have to see how the economy and business levels come along, but I expect these to improve in the next month or two,” he said.
The Report On Business® roundup:
Bloomberg: U.S. Service Gauge Falls More Than Expected as Demand Moderates. “While an index above 50 indicates expansion, the decline suggests companies and consumers are becoming more cautious. When paired with the latest ISM factory survey that showed a further deterioration, the services data may heighten concerns about the economic outlook as credit conditions tighten and interest rates remain high.”
Mace News: Service Sector Activity Loses Steam on Slower New Orders, Mixed Labor Market. “Asked about the slip in the main index for the sector, Nieves told reporters on Wednesday, ‘I’m always happy see anything above the 50 baseline. I would have personally preferred to see it in the mid-50s range.’ Before the plunge in December, the index indicated strong growth that was not sustainable, he said.”
#ISM Services (purple) dropped to 51.2 in March from 55.1 in February. Most major components dropped from their February levels, with New Orders (blue) plunging the most and Prices Paid (gold) at the lowest level since 2020. That bodes well for #inflation. pic.twitter.com/hf4HEvKK5q— Kathy Jones (@KathyJones) April 5, 2023
MarketWatch: The Biggest Part of the Economy Slowed in March, ISM Finds, as Strains Mount. “Most of these companies have been expanding as consumers shift to spending more on services instead of goods like they did during the pandemic. Yet most economists expect spending to slow even further and unemployment to rise due to persistently high inflation and rising interest rates. Higher borrowing costs make it more expensive to take out a loan, buy a house or car or use a credit card.”
Reuters: U.S. Service Sector Slows in March; Inflation Cooling. “With demand cooling, services sector inflation continued to subside, though it remains elevated. A measure of prices paid by services industries for inputs fell to 59.5 percent from 65.6 percent in February. The services sector is now at the heart of the fight against inflation as services prices tend to be stickier and less responsive to interest rate increases.”
In case you missed Monday’s Report On Business® Roundup on the release of the March Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Friday. ISM’s Spring 2023 Semiannual Economic Forecast for the manufacturing and services sectors will be released on May 8; it will also be the focus of a session that day at the ISM World 2023 Annual Conference in Grapevine, Texas.
For the most up-to-date content on the three indexes under the ISM® Report On Business® umbrella, use #ISMPMI on Twitter.