Services sector growth eases in March but is still solid, notes ISM

Services economy activity continued to show solid momentum in March, according to 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)—at 58.3 (a reading of 50 or higher signals growth)—headed up 1.8%, growing, at a faster rate, for the 22nd consecutive month, snapping a three-month stretch of sequential declines. Services sector growth has remained intact for 144 of the last 146 months through March, said ISM.

The March Services PMI is 4.0% below the 12-month average of 62.3, with November 2021’s 68.4 and February’s 56.5 representing the high and low points over the last 12 months, respectively.

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

The report’s equally weighted subindexes that directly factor into the NMI mostly saw gains in March, including:

• Business activity/production, at 55.5, increased 0.4%, growing, at a faster rate, for the 22nd consecutive month, with 13 services sectors reporting growth;
• New orders, at 60.1, increased 4.0%, growing, at a faster rate, for the 22nd consecutive month, with 15 services sectors reporting growth;
• Employment, at 54.0, increased 5.5%, growing after a month of contraction following seven straight months of growth, with 13 services sectors growing in March; and
• Supplier deliveries—at 63.4 (a reading above 50 percent indicates slower deliveries)—were down 0.5% compared to February, slowing, at a faster rate, for the 34th consecutive month

Comments from ISM member panelists included in the report highlighted various issues being seen in the services sector, including: supply chain issues and inflation, among others.

“Supply chain challenges continue at about the same levels as last month. Employment has improved as COVID-19 cases are declining,” said an Accommodation & Food Services respondent. “Restaurant sales have improved since Valentine’s Day, with mask and vaccine verification mandates being dropped.”

A Management of Companies & Support Services respondent said that concerns over inflation and rising energy prices are causing his company to take a cautious approach, especially related to planned capital expenditures.”

Tony Nieves, Chair of ISM’s Management Services Business Survey Committee, said in an interview that the March report can be viewed as a bit of a rebound month.

“It is nice to see employment come back in March, which is a key thing,” he said. “Gains in business activity and new orders are showing there is plenty in the pipeline, which is very nice. Overall, it is a great report, with 17 industries reporting growth. You cannot really knock that.”

While the growth was positive, Nieves noted that there are some lingering headwinds, in the form of inflation, noting that despite the Federal Reserve raising interest rates, it has not really staved out inflation. Other headwinds he cited included the ongoing Russia-Ukraine conflict, coupled with the uncertainty it continues to create, as it is mostly impacting chemicals and fuel prices. And the decline in China’s PMI (manufacturing activity) is being reflected in the contractions seen in March for imports (down 6.7% to 45.0).

“There is a lot going on,” he said. “We know supply chain [issues] have eased a little bit, and demand is still outpacing supply. “While inventories grew this month (up 0.9% to 51.7) inventory sentiment was off (down 15.1% to 40.2), showing that even though inventories grew month-over-month, it still was not sufficiently matching requirements to business needs.”

While there is optimism about services economy growth, Nieves said a watchful eye is required for the new Omicron-related variant, were it to lead to renewed masking mandates or a lockdown of any kind, as cases are on the rise in Europe but not in the U.S, with the caveat that things can change.

When asked about how the first quarter went overall for the services economy, Nieves said that while it was unrealistic for the Services PMI to remain in the 60s, incremental growth is expected to be in the cards going forward, as opposed to what he called huge spikes.

“I am hoping we don’t have any pullback based on any mitigating situations that may occur over the next few months,” he said. “There is still a lot of uncertainty relating to Russia and Ukraine…and it has some other ramifications that hopefully do not materialize.”