Report On Business® Roundup: March Services PMI®
In a week of U.S. economic indicators — from the manufacturing sector finally returning to expansion to improvement in private-payrolls growth — being well-received by markets, the Services ISM® Report On Business® for March was less so.
The composite PMI® reading of 51.4 percent, released on Wednesday, indicated growth for the 15th straight month but did not meet analysts’ expectations. Some eyebrows were raised by an Employment Index number that remained in contraction territory, and the lowest Prices Index reading in four years heightened uncertainties regarding the U.S. Federal Reserve’s (Fed) interest-rate reduction timetable.
“Life would be a lot easier for traders if we didn’t have contradictory information coming in,” Bloomberg TV analyst Michael McKee said while discussing the Services PMI® numbers. He concluded, “All in all, this is a good report, but slightly weaker than (in previous months), and it sort of breaks the chain of strong reports that we have seen all week.”
The PMI® was a 1.2-percentage point decrease compared to February, and of the four subindexes that directly factor into the composite figure, two — Employment and Supplier Deliveries — provided the anchor. The Employment Index reading of 48.5 percent was up slightly, but the Supplier Deliveries Index decreased 3.5 percentage points to 45.4 percent, its lowest reading since Services PMI® data collection began in 1997.
“Employment continues to be a mixed bag,” 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. “Certain industries are still having difficulty backfilling positions, while others are taking a cautious approach with labor, which is controllable and the largest variable expense for most service companies. Supplier deliveries being faster is a result of slightly reduced demand as well as improved efficiencies in the supply chain.”
Since the ISM® Report On Business® indexes measure month-over-month change, an Employment Index in contraction doesn’t necessarily contradict more positive jobs data. In fact, 19.1 percent of Business Survey Committee respondents indicated their companies added personnel in March, up from 13.5 percent the previous month. The sizes of industries reporting growth or contraction each month also affects the calculation, Nieves said.
“When you look at data history, the index (and a monthly jobs or payrolls report) are somewhat correlated, but they measure two different things,” Nieves said. “Even though there could be an increase on the payroll report for a company, it could be less than what it had month over month.”
The all-time low reading for the Supplier Deliveries Index — the index in inversed, so a higher reading means slower deliveries, typical for increased demand and an improving economy — was somewhat surprising, given continuing turmoil in the Red Sea and the drought limiting Panama Canal traffic. Supply chains have been efficient, Nieves said, though he added it’s too soon to tell how last week’s Baltimore bridge collapse will impact lead times in the services sector.
Recent global bottlenecks have not been a “notable challenge on supply for our sector, but we're watching carefully for disruption risk,” wrote a respondent in Accommodation & Food Services, adding that “the unrest in Haiti carries potential risk for the garment industry.”
For those with an eye on the Fed, the Prices Index reading of 53.4 percent, the lowest since March 2020 (50.4 percent), contrasted its ISM Manufacturing counterpart, which increased to 55.8 percent and was considered a bad sign for those awaiting an interest-rate reduction. On Wednesday, Fed chair Jerome Powell spoke at Stanford University in Palo Alto, California, saying that an interest-rate cut remained likely this year, but the timing is still to be determined as policymakers continue to crunch the data.
Nieves said he is “reading the same material as everyone else” regarding the Fed’s option but suggest recent prices and employment numbers could result in a rate-cut delay.
“Many of the costs in the services sector are impacted by overland trucking rates, and fuel prices continue to rise,” he said. “So, prices on other commodities could go up a bit, thanks to volatility on fuel. I don’t think we’ll get to the level of (Prices Index readings near) 80 percent like we had, but I don’t expect a contraction, either.”
witnessing the march ism services play limbo with expectations vs. reality is like reminding ourselves that the s&p isn’t just hard to beat; it’s the high school bully of investment options.
— Jon Markman 🛸 (@jdmarkman) April 3, 2024
The Report On Business® roundup:
Barron’s: Services Activity Cools More Than Expected. “The slowdown bolstered Wall Street's hopes of an interest-rate cut by the Federal Reserve. The three major stock market indexes clawed back losses shortly after the survey's midmorning release.”
Bloomberg: U.S. Services Growth Cools as Price Gauge Drops to Four-Year Low. “The services (Prices Index) may temper concerns that the Federal Reserve’s progress on inflation is at risk of stalling. Policymakers are tracking developments in the services sector, the largest part of the economy, for signs of easing price pressures as they debate when to reduce interest rates. … With the decline in March, ISM’s gauge of prices paid by services dipped below the manufacturing input-cost measure for the first time since May 2022.”
Mace News: Services Sector Expands for 15th Straight Month in March, But Key Index Unexpectedly Slips on Slower New Orders Growth, Weaker Employment. “There is volatility in the prices of fuels and other commodities while electrical components and equipment have been in short supply over months, (Nieves) noted. The pricing cycle in the services sector takes longer to change as the costs of tangible goods are absorbed over time in the supply chain, compared to a faster shift in the costs for the manufacturing sector.”
Interesting comment on higher ed in the ISM services report: pic.twitter.com/OrdJGZKgXB
— Tim Duy (@TimDuy) April 3, 2024
MarketWatch: U.S. Economy Expanded in March at Slightly Slower Speed, ISM Shows. Inflation Cools a Bit. “Economists polled by The Wall Street Journal had predicted an ISM reading of 52.7 percent. … The economy has largely shrugged off the highest interest rates in 23 years and is growing at an above-average speed. The economy could get more fuel to expand this year due to low unemployment and steady hiring — plus the likelihood that the Federal Reserve will trim interest rates.”
Reuters: U.S. Service Sector Expands Moderately in March; Price Pressures Easing. “The PMI® remains consistent with an economy that continues to expand, though at a moderate pace. Growth is slowing following 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022. The U.S. central bank is expected to start cutting rates this year, but the timing will depend on how inflation behaves. Services are the main driver of inflation, via higher wages.”
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. 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/Kobus Louw)