September Services PMI reading points to growth, notes ISM

Services economy growth remained fully intact in September, according to data in the most recent edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 61.9 (a reading of 50 or higher indicates growth is occurring), up 0.2% compared to August and in close range to July’s all-time high reading, at 64.1. The Services PMI grew for the 16th consecutive month, with services sector growth intact in 138 of the last 140 months.

The September Services PMI reading is 1.7% above the 12-month average of 60.2, with July representing the highest reading for that period and February’s 55.3 representing the lowest reading.

ISM reported that 17 of the 18 services sectors it tracks saw gains in September, including: Retail Trade; Arts, Entertainment & Recreation; Management of Companies & Support Services; Educational Services; Transportation & Warehousing; Real Estate, Rental & Leasing; Accommodation & Food Services; Construction; Mining; Professional, Scientific & Technical Services; Other Services; Information; Health Care & Social Assistance; Utilities; Public Administration; Wholesale Trade; and Finance & Insurance. The lone industry to see a decrease was Agriculture, Forestry, Fishing & Hunting.

The report’s equally weighted subindexes that directly factor into the NMI saw decreases in September, including:

-business activity/production increasing 2.2%, to 62.3, growing, at a faster rate, for the 16th consecutive month, with 17 sectors reporting growth;
-new orders up 0.3%, to 63.5, growing, at a faster rate, for the 16th month in a row, with 17 service sectors reporting growth;
-employment fell 0.7%, to 53, growing, at a slower rate, for the third straight month, which was preceded by five straight months of growth, with 14 services sectors reporting growth; and
-supplier deliveries, at 68.8 (a reading of 50 or higher indicates contraction), showed slowing, at a slower rate, for the 28th consecutive month, with 17 services sectors reporting growth

Comments from ISM member respondents included in the report pointed to myriad supply chain-related issues, including an uptick in transportation bottlenecks, resulting in longer lead times and missed appointments.

A construction respondent pointed to how constraints on logistics from a cost and availability standpoint continue to be an issue. And a Transportation & Warehousing respondent said that demand far outweighs supply for goods and services.

Tony Nieves, Chair of ISM’s Management Services Business Survey Committee said in an interview that employment was again a big theme of this report, with companies still struggling to backfill positions, as well as a difficult environment for recruiting, especially for lower-skilled-type jobs.

Another key theme cited by Nieves is pricing pressure (September services prices rose 2.1%, to 77.5, increasing, at a faster rate, for the 52nd consecutive month).

“Everyone is asking how long will this pricing pressure and inflation be, and if it is truly transitory as the Fed and others have said,” he said. “The key thing is that our respondents were saying two years ago that they thought it would carry through into the first quarter of 2022 and now they are saying it could be even further. I think we will get a better feel for that, when we issue our Semiannual report in a few months.”

And with Business Activity/Production in the low 60s range over the past few months, Nieves said that is a strong number, especially when taking into account production is still not at full capacity, with capacity constraints still occurring.

“These constraints are related to labor, materials shortages, and demand exceeding supply,” he said.

Looking ahead, Nieves said that it is within reason to expect services sector output to remain at, or near, current levels in the coming months.

“I was anticipating some pullback in September and was surprised it popped up a little bit,” he noted. “You would think it would wane from the initial demand. What I think is keeping demand strong is that there just is not the supply. I think we are going to see still-consistent growth going forward, but I don’t know if it will stay as high as it is right now, but there will be growth throughout, there is no question about that. Also, over the last four months, we have seen inventories contracting, and they cannot be replenished fast enough. Companies are not getting orders in the proper cycle time and are not getting full orders. There are still certain things on allotment.”