When the calendar enables alignment of key economic data releases, some mornings can feel like a Fourth of July parade of reports, especially when they contain good news — a dynamic experienced on the transatlantic sets of Bloomberg TV on Thursday.
“What has made you gasp so?” Alix Steel in New York asked her co-host, Guy Johnson. From his desk in London, Johnson explained how the federal Job Openings and Labor Turnover Survey (JOLTS) data for May had no surprises, which is a positive, then moved on to the private payrolls report from ADP and the Stanford Digital Economy Lab that exceeded expectations, with 497,000 jobs added in June, the highest figure in over a year.
Finally, he marveled at the just-released Services ISM® Report On Business® for June, which beat analysts’ forecasts with a composite PMI® of 53.9 percent, a 3.6-percentage point increase compared to the previous month. “Wow, look at this. It basically completes the picture of very strong data today,” Johnson said.
That segment led into an interview with Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® Services Business Survey Committee. He told Steel and Johnson that “an uptick in all the key numbers” — especially a combined 14.2-percentage point increase in the Business Activity, New Orders and Employment indexes — helped power the Services PMI® increase.
“We’re seeing the largest growth in Accommodation & Food Services and Arts, Entertainment & Recreation, which indicates respondents are telling us people are spending more money on experiences instead of tangible goods,” Nieves told Bloomberg TV.
With the federal jobs report to be released on Friday, the Employment Index returning to expansion at 53.1 percent, a 3.9-percentage point gain compared to May, was one of the more eye-popping numbers that also aligned with the private payrolls report. That hasn’t always been the case in recent months, as Business Survey Committee respondents have expressed frustration at their inability to fill open positions.
But in June, ADP and the Stanford Lab reported, 232,000 jobs were filled in leisure and hospitality. Nieves told a conference call of reporters on Thursday that services labor remains a mixed bag, but many survey respondents commented on greater hiring ease in June.
A an econ barrage today. Labor market sees a +497K private sector jobs gain in June, May Job Openings -500K to 9.8M, while ISM's June Services index rose more than expected, the 6th consecutive month of growth. Market expecting higher rates, #DOW -422 #NASDAQ -206 @KCBSRadio— Jason Brooks (@brookskcbsradio) July 6, 2023
“Many of our panelists have said that in the past, they weren’t able to hire or they were holding back, but it looks like activity has increased more across the board,” he said. “They’re starting to fill open positions, but the labor pool is still not as robust as it as it’s been in the past. Some of the challenges from the (coronavirus) pandemic are still there.”
On Thursday, as has been the case for months, much of the reaction to the data involved speculation on how the U.S. Federal Reserve might respond — meaning that for interest-rate watchers, good news could be bad news. While the composite PMI suggested the services sector is heating up, the Prices Index fell to 54.1 percent, down 2.1 percentage points and its lowest reading since March 2020 (50.4 percent).
The Fed’s 10 interest-rate hikes since March 2022 have had the desired cooling-off effect on the manufacturing sector, as ISM’s data has shown. Significant impact has been felt on the services side, Nieves pointed out, in such areas as home construction starts and other activity in the Real Estate, Rental & Leasing industry. The Fed’s next meeting is on July 25-26.
“Prices have been moderating, but they’re still strong,” Nieves said. “Even though the Federal Reserve left interest rates alone last month, it still wants to keep inflation down, and prices are still increasing, though at a slower rate. We’ll see what the Fed does.”
Separating the Signal from the Noise..— James E. Thorne (@DrJStrategy) July 6, 2023
Todays Services ISM is exactly what to expect when inflation declines and we get a soft landing. 👇 pic.twitter.com/li9IBgQnyQ
Lastly, Nieves reiterated when ISM’s Semiannual Economic Forecast revealed in May: Business Survey Committee respondents are not bracing for a U.S. economic recession. The continuing contraction in manufacturing as raised recession anxiety among some panelists in that sector, but Nieves said no such sentiment has been expressed in services.
And considering that services makes up more than 85 percent of U.S. gross domestic product, perhaps that sector can carry the economy for a while. “Let’s keep an eye on manufacturing, which tends to pick up in September after slowing in the summer,” Nieves said. “But when you look at services right now, things are looking good.”
The Report On Business® roundup:
Agence France-Presse: U.S. Services Activity Expanded In June For Sixth Straight Month. “The strong services sector suggests the U.S. Federal Reserve’s fight against inflation has some road left to run. The Fed recently paused its aggressive campaign of interest rate hikes after 10 consecutive increases, despite inflation lingering above its long-term target of 2 percent.”
Bloomberg: U.S. Services Activity Expands by Most in Four Months on Stronger Demand. “The figures show healthy and resilient demand for services as Americans favor spending on experiences while limiting discretionary purchases of merchandise. That dynamic helps explain a growing gulf between the two ISM surveys. The manufacturing report, out earlier this week, showed factory activity contracted at the fastest pace in more than three years.”
CNBC: Job Openings and Labor Turnover Data Come in Under Wall Street Forecasts. “Let’s look at the services side from ISM: 53.9 percent is the June read,” analyst Rick Santelli said. “In the rear-view mirror, it’s the best level going back to February, when it was 55.1. (The Prices Index) was 54.1 (percent), and we all know this particular number, if you’re monitoring inflation and its impact on Fed decisions, you want it to be lower … and that’s the lightest level since March 2020.”
Mace News: Service Sector Activity in Expansion Territory for Sixth Straight Month on Pickup in New Orders, Easing Inflation. “Credit tightening has slowed the housing sector, (Nieves) said, adding there are expectations that the Federal Reserve will be raising interest rates again to guide inflation lower after pausing in June during its tightening cycle that began in March last year. Asked whether the weakness in the manufacturing sector may dampen confidence among service providers, Nieves said consumers are spending more on recreation, traveling and food while the retail sector is slightly down.”
Aaaand ISM services backed up the strong ADP & Challenger. Employment and New Orders driving a solid headline beat at 53.9 vs 51.2 consensus expectations.— Parker Ross (@Econ_Parker) July 6, 2023
Buckle up for Friday's payrolls print. I'll take the over on the 225k consensus estimate. pic.twitter.com/ZEc6g5JNNY
MarketWatch: U.S. Service Sector Strengthens in June for Sixth Month, ISM Says. “Fifteen out of 18 industries reported growth in June. New orders, activity and employment all increased. The majority of respondents indicate that business conditions remain stable, but they are cautious relative to inflation and the outlook. … The service sector and consumer spending has been driving the economy this year. The June data don't signal any slowdown.”
Reuters: U.S. Service Sector Picks Up in June; Inflation Gradually Slowing, ISM Survey Shows. “The survey is among several indicators, including housing starts, nonfarm payrolls and orders for long-lasting manufactured goods, that have suggested the economy continues to plod along despite growing risks sparked by hefty interest rate increases from the Federal Reserve.”
In case you missed Monday’s Report On Business® Roundup on the release of the June 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 Twitter.