Services economy sees continued growth in August, notes ISM

August services economy activity saw another month of growth, according to the new edition of the ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The Services PMI—at 54.5 (a reading of 50 or higher signals growth)—increased 1.8%, growing, at a faster rate, for the eighth consecutive month. ISM said that the services sector has seen growth in 38 of the last 39 months, with December 2022 being the one month with a decline.

The August Services PMI is 1.2% above the 12-month average of 53.3, with September 2022’s 55.9 and December 2022’s 49.2 marking the respective high and low readings for that period.

ISM reported that 13 of the 18 services sectors it tracks saw gains in August, including: Real Estate, Rental & Leasing; Accommodation & Food Services; Other Services; Arts, Entertainment & Recreation; Utilities; Retail Trade; Public Administration; Information; Educational Services; Construction; Finance & Insurance; Transportation & Warehousing; and Professional, Scientific & Technical Services. The five sectors posting decreases included: Agriculture, Forestry, Fishing & Hunting; Mining; Wholesale Trade; Health Care & Social Assistance; and Management of Companies & Support Services.

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

-Business Activity/Production, at 57.3, increased 0.2%, growing, at a faster rate, for the 39th consecutive month, with 12 sectors reporting growth;
-New Orders, at 57.5, increased 2.5%, growing, at a faster rate, for the eighth consecutive month, with 12 sectors reporting growth;
-Employment, at 54.7, rose 4.0%, growing, at a faster rate, for the third consecutive month, with eighth sectors reporting growth;
-Backlog of Orders, at 41.8, fell 10.3%, contracting, after growing in July, with five sectors reporting growth;
-Supplier Deliveries, at 48.5, (a reading above 50 indicates slower deliveries) were off 0.4% from July, growing faster, at a slower rate, for the seventh consecutive month, with four sectors reporting slower deliveries;
-Prices, at 58.9, grew 2.1%, increasing, at a faster rate, for the 75th consecutive month, with 12 sectors reporting growth; and
-Inventories, at 57.7, up 7.3%, growing, at a faster rate, for the fourth consecutive month, increasing, at a slower rate, for the 73rd consecutive month, with 12 sectors reporting growth; and
-Prices, at 58.9, up 2.1%, increasing, at a faster rate, for the 75th consecutive month, with 12 sectors reporting growth

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

“The supply chain challenges affect a portion of our buys, as they include products and components made outside of the U.S. and are subject to shipping delays and issues,” said a Management of Companies & Support Services respondent. “The prices of materials and other products have slightly increased. Distribution of some direct materials has been altered due to a key supplier financial issue.”

A Retail Trade respondent said that business activity continues to be lower year over year, with his company meeting the year-to-date forecast.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that the metrics in the August report are about a month ahead of expectations.

“It was mostly driven by the 4.0% increase on the employment side,” he said. “That is a nice bump. “Even though the August jobs report was below what was expected, it is still a little bit above the pre-pandemic average. I am curious to see where September will end up, because that is always a pivotal month coming out of summer and into the holiday season build-up. I think we will stay on this path going forward, with incremental growth.”

Nieves added that for Transportation & Warehousing came in just above the 50-baseline reading for the Services PMI, while Wholesale Trade contracted. And for Business Activity, he noted that the sector was unchanged from July to August, with Wholesale Trade seeing an increase.

“Transportation & Warehousing is very important for the Services sector, because they are intermediaries,” he said. “Their volume tells you what kind of things are happening between the upstream on the manufacturing side, going through the distribution channel to the end user on the services side.”

Looking ahead, Nieves said it is reasonable to expect a slight shift in September and October, in which there could be less spending on services and experiences and more on consumer goods, with spending on services and experiences continuing, albeit at a reduced rate.

“It might pick up again around the holiday season, especially around Thanksgiving, which is the busiest travel time of the year.”

Addressing the 7.3% increase in Inventories, Nieves explained that it is related to how large shipments ordered a while back are now starting to arrive.

“Orders were in larger quantities in the past because of demand exceeding supply and now companies are trying to right-size their inventories, but they’ve had all this build up,” he said. “And there’s still stuff sitting out there in warehouses that have not moved as much, and it depends on the commodity in the industry.”

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