On the heels of stronger-than-expected U.S. gross domestic product (GDP) growth in the fourth quarter of 2023 and a blockbuster federal jobs report for January, the Services ISM® Report On Business® data on Monday completed a trifecta of recent positive economic news.
The composite index reading of 53.4 percent beat expectations, powered by strong business activity and employment growth — but supplier deliveries slowed and prices climbed. Add it all up, and the sunny economic sentiment included grumpy spin for watchers of the U.S. Federal Reserve: “For those still betting on a March (interest) rate cut,” Bloomberg TV host Katie Greifeld said after the report’s release, “I wish them luck.”
While those longing for a rate decrease will likely have to wait longer, the Services PMI® data was, in many ways, a pleasant surprise. The sector typically experiences a post-holidays lull, but growth accelerated. And in Institute for Supply Management®’s Semiannual Economic Forecast released in December, survey respondents forecast a slowdown in services growth in the first quarter; the January numbers suggest that scenario might be avoided.
PMI® Insights, Straight From the Sources
“Since the end of the (coronavirus) pandemic and the release of the pent-up demand, we were going back to the trends of prior years that saw a little lull after the holidays,” 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 Monday. “We didn’t see that. Growth usually picks up at the end of January, but it seemed to get here a little faster this time.”
The Business Activity Index reading of 55.8 percent matched the December figure, and the New Orders Index increased 2.2 percentage points to 55 percent. The Employment Index echoed the federal jobs report by returning to expansion at 50.5 percent, up 6.7 percentage points compared to the previous month.
Those are three of the four subindexes that directly factor into the Services PMI. The other is the Supplier Deliveries Index, which moved into expansion (or “slower” territory) for just the second time in the last 12 months, at 52.4 percent. Supplier Deliveries is the only ISM® Report On Business® index that is inversed; a reading above 50 percent indicates longer lead times, which is typical as the economy improves and demand increases.
While slower supplier delivery performance is not always a bad thing, the January index reading might have been primarily a product of delays from winter weather in the U.S., drought at the Panama Canal and Houthi attacks on cargo ships in the Red Sea. Such disruptions, “are impacting both costs and schedules for the transport of global goods,” wrote a Business Survey Committee respondent in Construction.
ISM Services Index rose to its highest level in 4 months. Most major components were up, but the prices paid index jumped more than 7 points to its highest level since February 2022. Treasury yields rose even higher on the news. pic.twitter.com/cKHkin3xGG— Kathy Jones (@KathyJones) February 5, 2024
The turbulence has helped raise transportation costs, which was one of the forces impacting a rise in the Prices Index that figures to impact interest-rate decision-making. The index registered 64 percent, up 7.3 percentage points compared to December — its largest month-over-month increase since August 2012.
Among the 15 commodities designated as up in price in January, labor has been the most nagging, listed for 38 consecutive months. Nieves said other commodity price concerns include polyvinyl chloride (PVC) components, as well as food and catering.
“The whole point of the Fed’s interest-rate policy is to combat inflation, so these pricing trends will have an impact,” Nieves said. “It’s definitely not as bad as when the index was above 80 percent (during the pandemic), but we’ve been seeing strong price increases over the last year, with the index in the 50s. But that’s a big jump. I’d like to see the index back in the 50s.”
The Report On Business® roundup:
Bloomberg: U.S. Services Gauge Rises to Four-Month High While Prices Pick Up. “U.S. companies are contending with soaring shipping costs amid militant attacks in the Red Sea that are prompting carriers to reroute. … (T)he services report showed stronger export growth and higher backlogs. A measure of sentiment about inventory levels rose, indicating respondents see their stockpiles as too high relative to demand.”
CNBC: ISM Non-Manufacturing Reading Hits 53.4, Higher Than Expected. “On the (Prices Index), unfortunately, it’s moving up as well,” analyst Rick Santelli said. “We don’t want prices moving higher: 64 percent, following 56.7 (in December), and that would be the highest level going back to February. … These ISM numbers — but especially prices paid being higher — are pushing Treasury yields up.”
Mace News: Services Sector Expands for 13th Straight Month in January; Index Rebounds on New Orders, Jobs After December’s Unexpected Dip. “Some (companies) still find it hard to recruit workers while others see high turnover, Nieves said. Last month, he predicted that hiring activity by service providers should resume in mid-January after a seasonal slowdown as they tend to secure workers before the busy holiday season.”
MarketWatch: Economy Perks Up Early in the New Year, ISM Finds, as Looming Interest-Rate Cuts Fuel Optimism. “The economy never really slowed down last year even after the Federal Reserve jacked up interest rates to a 23-year high to try to tame inflation. If anything, growth appears to have perked up early in 2024 amid the looming prospect of interest-rate cuts later in the year.”
Wells Fargo: prices paid component stole spotlight in today's #ISM services report by posting largest monthly percentage gain since 2012... remember that diffusion indices such as these are measures of breadth not magnitude. Still, it's hardly supportive of the case for #ratecuts— Francesc Riverola - FXStreet.com (@Francesc_Forex) February 5, 2024
Reuters: U.S. Service Sector Growth Picks Up in January. “The report added to January's blowout employment gains in suggesting that economic growth momentum from the fourth quarter spilled over into the new year. It also further diminished the chances of an interest rate cut in March.”
The Wall Street Journal: U.S. Services Activity Expands More Than Expected, Says ISM. “The (Prices Index) rose 7.3 points to 64.0 percent, a reflection of underlying inflationary pressures that could concern policymakers at the Federal Reserve. Ten of 17 industries ISM measures reported growth in January, led by health care and agriculture.”
In case you missed Thursday’s Report On Business® Roundup on the release of the January Manufacturing PMI®, you can read it here. The Hospital PMI® will be released on Wednesday. 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.