September Services sector activity remains on a growth path, reports ISM

Services economy activity turned in another strong month in September, according to the new edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The Services PMI—at 56.7 (a reading of 50 or higher signals growth)—was down 0.2% compared to August, growing, at a slower rate, for the 28th consecutive month, with month, with services sector growth intact for 150 of the last 152 months through September.

The September Services PMI is 2.5% below the 12-month average of 59.2, with November 2021’s 68.4 and June’s 55.3 marking the respective high and low readings for that period.

ISM reported that 15 of the services sectors it tracks saw annual gains in September, including:
Mining; Other Services; Educational Services; Agriculture, Forestry, Fishing & Hunting; Public Administration; Retail Trade; Wholesale Trade; Information; Utilities; Professional, Scientific & Technical Services; Health Care & Social Assistance; Finance & Insurance; Real Estate, Rental & Leasing; Construction; and Management of Companies & Support Services. The three industries reporting decreases were: Accommodation & Food Services; Arts, Entertainment & Recreation; and Transportation & Warehousing.

The report’s equally weighted subindexes that directly factor into the NMI were mostly down, from August to September, including:

• Business activity/production, at 59.1, down 1.8%, growing, at a slower rate, for the 28th consecutive month, with 14 services sectors reporting growth;
• New orders, at 60.6, down 1.2%, also growing, at a slower rate for the 28th consecutive month, with 13 services sectors reporting growth;
• Employment, at 53.0, increased 2.8%, growing, at a faster rate, for the second consecutive month, with 10 services sectors reporting growth;
• Supplier deliveries, at 53.9, fell 0.6%, slowing, at a slower pace, for the 40th consecutive month; and
• Prices, at 68.7, fell 2.8%, increasing, at a slower rate, for the 64th consecutive month

Comments from ISM member respondents included in the report highlighted various issues being seen in the services sector.

“Prices of fuel are leveling off (or) dropping in small increments,” said a Transportation & Warehousing respondent. “Still facing supply/demand issues with certain products—food, beverages, some raw construction material and semiconductor chips. Big concern is (China’s) zero-tolerance policy for COVID-19 cases. A lot of companies rely on products from China, and cities keep shutting down due to the policy. This greatly affects the orders outstanding and creates lead time uncertainty.”

And a Wholesale Trade respondent said that Business activity has improved over last month but is still trending flat to slightly down versus the same period last year. The respondent added that inventory levels are starting to fall from record highs, but overstocked items are still a problem, with the expectation that his company can expect lower demand and inventory rebalancing to impact business activity through the end of the calendar year.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that this report on a year-over-year basis is mapping consistently to GDP, with a large percentage of GDP on the services side being more labor-intensive and less reliant on tangible goods.

“Overall, the services sector is holding its own, especially when you see new orders at 60.6,” he said. “It tells us the pipeline is still very strong, but keep in mind the cycle time is still much shorter than it is on the manufacturing side. This could change in two months, with the Services PMI in the low 50s by year-end, with things getting geared up on retail and other areas for the holiday season.”

What’s more, he said that there are previous historical patterns that are no longer intact, due to the pandemic, which has blurred seasonality, as it was previously seen, with the expectation that there will not be an alignment, in terms of normal seasonality trends, until possibly in 2023.

“What we are seeing now is that things are still strong in spite of inflation,” he said. “We know certain industries have been hammered by interest rates but not to the point where there is less growth month-over-month, because there are still remnants of what was in the pipeline in the past.”

Using real estate rental and leasing, which is the largest contributor to GDP on the services side, as an example, he said the sector is trying to get in as fast as it can prior to the next steps for interest rates, while business for mortgage brokers and lenders remains busy, even though sales have been off over the last few months.

Looking at the rest of 2023, Nieves is optimistic that the services sector will finish things strongly, with a possibility that the Services PMI will inch down by year-end from its current level. He added that employment is likely to stay above 50, spurred on by the holiday season, but January could tell a different story.

“There are a lot of variables and wildcards in the mix here,” he said. “But our respondents are optimistic, in that they don’t see a recession coming or any kind of pullback through the balance of 2022…but they also said they don’t know what 2023 has in store. I think we will get a better feel for that in December.”

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