August Services PMI turns in a strong reading reports ISM

Services economy activity continued to show solid growth in August, 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 56.9 (a reading of 50 or higher signals growth)—edged out the July reading by 0.2%, growing, at a faster rate, for the 27th consecutive month, with services sector growth intact for 149 of the last 151 months through August.

The August Services PMI is 2.8% below the 12-month average of 59.7, with November 2021’s 68.4 and June’s 55.3 marking the high and low readings over that period, respectively. 

ISM reported that 14 of the services sectors it tracks saw annual gains in August, including: Mining; Real Estate, Rental & Leasing; Utilities; Construction; Educational Services; Information; Transportation & Warehousing; Wholesale Trade; Health Care & Social Assistance; Public Administration; Finance & Insurance; Management of Companies & Support Services; Professional, Scientific & Technical Services; and Other Services. The two sectors with August declines were Agriculture, Forestry, Fishing & Hunting and Arts, Entertainment & Recreation.

The report’s equally weighted subindexes that directly factor into the NMI were mostly up in August, including:

• Business activity/production, at 60.9, rose 1.0%, growing, at a faster rate, for the 27th consecutive months, with 11 services sectors reporting growth;
• New orders, at 61.8, increased 1.9%, growing, at a faster rate, for the 27th consecutive months, with 12 services sectors reporting growth;
• Employment, at 50.2, was up 1.1%, growing after contracting, at a slower rate, for two straight months, which was preceded by seven straight months of growth;
• Supplier deliveries, at 54.5 (a reading above 50 indicates slower deliveries), slowed, at a slower rate, for the 39th consecutive month; and
• Prices were down 0.8% in August, to 71.5, increasing, at a slower rate, for the 63rd consecutive month

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

An Accommodation & Food Services respondent pointed to how his company is starting to see some cost pressures relief, adding that the overall supply environment is healthy. And a Management of Companies & Support Services respondent said that the supply chain challenges affect a portion of its buys as they include products and components made outside of the U.S. that are subject to shipping delays and other issues. 

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that this solid report helps the quell the chorus of people maintaining that the economy is in a recession or approaching one.

“It is not gloom and doom,” he said. “I see things where inflation is peaking and cooling off a bit, and the economy is humming along well. This data tracks historically closer to GDP output than anything else out there, as our panelists are in various parts of supply chain and procurement for companies and are reflective of their companies’ contribution to GDP.”

Looking at the report’s findings, Nieves said that a key takeaway was another strong month of news orders growth, with August topping the 60 mark and putting it in a good position heading into the last quarter of the year, with the expectation of continued growth through the balance of 2022, as well as expectations for a strong holiday season.

“When you look at what it is in the pipeline, it is good news,” he said. “Hopefully, we see some pullback in prices into the low-60’s hopefully soon.”

That pullback, though, he cautioned, is not likely to be a byproduct of lower gasoline prices, which he said is more of a timing thing.

As for supplier deliveries, he explained the somewhat better numbers, for the metric, are reflecting some supply chain improvements.

“Slower deliveries should be viewed as a good thing, not a bad thing,” he said. “It is at a good and manageable level, at 54.5. I would not want to see that number contract by any stretch, as that would mean there is no demand.”

The impact of inflation on the services economy, said Nieves, coupled with more consumers taking part on services-related activities, are collectively coming into the picture. And with the Federal Reserve continuing to raise interest rates to essentially attack inflation, he said its approach appears to be to attack inflation hard, raise rates, as it is easier to pull back than it is to go forwardly adjust rates.

Looking at employment, Nieves described it as a mixed bag.

“Even though some companies are announcing layoffs, the last jobs report showed growth, albeit not to some previous levels. [Staffing] is still at a manageable level, and over all I think you are going to see employment stay around this baseline. It is going to be up or down slightly. I don’t expect any huge spikes, because the demand for workers…and the labor pool seems to have restricted more of those lower-end, customer-facing, tedious types of jobs in food services, retail, and some other areas. Some tech companies are also laying people off. Again, it is really a mixed bag right now.”

When asked about the outlook for the services economy over the remainder of the year, Nieves said he is hoping to see further steady and incremental growth over that period, with the Services PMI remaining in the mid-50s range based on what is currently in the pipeline.

“Not everything is at 100% capacity,” he said. “I think there is some room for growth. Hopefully, the holiday season is not a bust and is a boom, and we will see where things go from there.”