The Services ISM® Report On Business® on Friday revealed continued cooling, reflected in a composite PMI® of 51.8 percent, and culminated a flurry of data that raised a question that could burn hotter in the coming weeks.
Is the U.S. economy on the verge of the “soft landing” — a taming of inflation while avoiding a recession — that recent Federal Reserve (Fed) policy was designed to provide? Earlier this week, the Fed announced that interest rates, which have reached a 22-year high after 11 hikes since March 2022, would stay put for now.
While many commodity prices remain a concern, the week’s lower-than-projected numbers — including an ISM Manufacturing PMI® of 46.7 percent on Wednesday and a federal jobs report on Friday that indicated nonfarm payrolls expanded by 150,000 in October — have some analysts asking if the Fed’s job could finally be finished.
“I don’t think these are terrible numbers at all,” Bloomberg’s Michael McKee said of the Services PMI® data. “It just suggests a slowdown, which is what the Fed has been looking for.”
Asked on Bloomberg TV if he felt a soft landing is possible, Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® Services Business Survey Committee, said yes. He noted that the manufacturing sector appears to have bottomed out, adding, “Services has been resilient and strong. We’ve seen a pullback on the composite index, but it still indicates growth month over month.”
The October Services PMI® was the lowest since May, thanks to a combined 10.8-percentage point decrease in three — Business Activity, Employment and Supplier Deliveries — of the four subindexes that directly factor into the composite number.
However, the New Orders Index (the other factoring subindex) increased 3.7 percentage points, a positive sign for future activity. That boost was especially encouraging, considering the New Export Orders Index fell into contraction territory, registering 48.8 percent after its fourth-largest monthly decrease (14.9 percentage points) ever.
“With the new orders improvement, I think we might see higher (overall) performance next month, especially as we’re approaching the holiday season,” Nieves told a conference call of reporters on Friday. “I don’t want to get ahead of myself, but indications are that there’s not going to be a severe pullback; in fact, we might have a little bit of a bump. I think the sector should finish fairly decent in this last quarter.”
While the impact on the New Orders Index is limited — 72 percent of Business Survey Committee respondents noted in October that they do not perform or measure export orders — demand for such exported services as IT or business consulting was down significantly. The war between Israel and Hamas was a big factor; wrote one survey respondent in Professional, Scientific & Technical Services, “(C)ommunications with clients in the Middle East are pretty much shut down.”
softer construction data + soft jobs day + soft ISM manufacturing report + softer ISM services print— Alex Williams (@vebaccount) November 3, 2023
overall, seems like the economy is slowing down across the board rounding the corner into the holidays
In other subindex news, the Prices Index (58.6 percent in October, down 0.3 percentage point) will continue to be closely watched by the Fed. While no longer sky-high, the index is lofty but not out of line with 2019 levels; it averaged 57.5 percent that year. Wrote a survey respondent in Accommodation & Food Services, “In general, commodity prices are coming down, but some categories, especially labor, are still elevated and will remain so for the immediate future.”
The Employment Index decrease to 50.2 percent was consistent with the October federal jobs data. While some survey respondents commented on the resolved United Auto Workers strike, Nieves noted that another work stoppage — by the Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) — continues to directly impact such industries as includes Arts, Entertainment & Recreation and Information.
The Inventories Index fell into contraction at 49.5 percent, down 4.7 percentage points compared to September. “This reflects a strategy of some businesses of correcting inventories, getting them back to pre-(coronavirus) pandemic levels as well as freeing up cash liquidity,” Nieves said. “Respondents also indicated that inventory levels are being corrected based on the order frequency.”
ISM services numbers mostly cooler as well... more bad news for Main Street being taken as good news on Wall Street today. pic.twitter.com/hI3o7KlpiW— Lobo Tiggre (@duediligenceguy) November 3, 2023
The Report On Business® roundup:
Bloomberg: U.S. Services Growth Slips to Five-Month Low as Activity Softens. “The survey suggests the economy is settling back in the fourth quarter after expanding in the previous three months by the most in nearly two years. While demand for services is holding up, a sustained slowdown would underscore a bigger impact from stiffer financial headwinds.”
CNBC: U.S. Services Sector Grows at Slightly Slower-Than-Expected Pace. “If we’re looking for numbers that may move the market, there are some surprises here,” analyst Rick Santelli said. “ISM Services for October was 51.8 percent, the weakest level since May of this year. … If we look at the (Employment Index), after having a weaker-than-expected federal jobs report, this one fits right in: 50.2 (percent), the weakest since it was under 50 in May.”
Mace News: Services Sector in Expansion for 10th Straight Month but Slows Down Sharply in Light of Geopolitical Risks, Labor Costs and Shortages. “Of the four sub-indexes that directly factor into the services PMI, growth in business activity slowed sharply, new orders rose at a faster pace, employment conditions eased to just above the neutral line, and supply deliveries were faster due to higher capacity, improved supply chains and waning demand.”
MarketWatch: U.S. Economy Slows in October, ISM Services Survey Shows. “The economy grew in the third quarter at the fastest pace in a decade, excluding the pandemic years of 2020-21. But higher interest rates and still-high inflation are bound to slow the economy in the waning months of the year. The October ISM report could be an indication of that.”
All of the data today is consistent with slowing growth but higher prices (ISM services prices huge move up). Slowing growth makes sense given tightening in FCI + unsustainable Q3. What's unclear is if the now loosening of FCI will mitigate some of the growth slowdown.— Danny Dayan (@DannyDayan5) November 3, 2023
Reuters: U.S. Services Sector at Five-Month Low in October. “Economists polled by Reuters had forecast the index slipping to 53 (percent). Demand for services initially surged as Americans resumed normal lives after COVID-19 lockdowns. But momentum has ebbed, with spending swinging back to goods. Spending on goods far outpaced outlays on services in the third quarter.”
In case you missed Wednesday’s Report On Business® Roundup on the release of the October 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 Twitter.