Despite sequential decline, March Services PMI points to growth, reports ISM

Services economy activity finished the first quarter on solid footing, 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 51.2 (a reading of 50 or higher signals growth)—was down 3.9% compared to February’s 55.1, growing, at a slower rate, for the third consecutive month. ISM said that the services sector has seen growth in 33 of the last 34 months, with December 2022 being the one month with a decline. 

The March Services PMI is 3.7% below the 12-month average of 54.9, with April 2022’s 57.5 and December 2022’s 49.2 marking the respective high and low readings for that period.

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

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

• Business activity/production, at 55.4, fell 0.9%, growing, at a slower rate, for the 34th consecutive month with 14 sectors reporting growth;
• New orders, at 52.2, fell 10.5%, growing, at a slower rate, for the third straight month, with 12 sectors reporting growth;
• Employment, at 51.3, decreased 2.7%, growing, at a slower rate, for the second consecutive month, with 11 sectors reporting growth;
• Backlog of orders, at 48.5, fell 4.3%, contracting after 26 consecutive months of growth, with three sectors reporting growth;
• Supplier deliveries, at 45.8 (a reading above 50 indicates slower deliveries), were off 1.8%, with three services sectors reporting slower deliveries;
• Prices, at 59.5, falling 6.1%, increasing, at a slower rate, for the 70th consecutive month, with 13 services sectors reporting growth; and
• Inventories, at 52.8, growing, at a faster rate, for the second consecutive month, with nine sectors reporting growth

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

A Construction sector respondent said that sales continue to increase, even as interest rates moderately increase.

“Most suppliers feel their supply chains are back to normal, with inventories climbing and delivery times improving,” said the panelist. “[We] fear this will have a detrimental effect in a six- to 12-month time frame.”

A Transportation & Warehousing respondent said that supply is starting to stabilize, adding that prices are coming down but in small increment, as food prices remain high, and availability continues to be a challenge.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that despite the sequential decrease, from February to March, for the Services PMI, that services economy growth remains intact. 

Addressing the 10.4% decline in New Orders, he explained that the March reading was coming off of a very strong 62.6 reading in February, which was preceded by high rates of growth for several months. 

“We have better capacity now and improved logistics,” he said. “The supply chain is not as fractured like it was, and we have this reduced cycle time, so they are cutting back on the orders, because back when demand was high and supply was short, the mindset was to increase order quantity and increase order frequency. So, now we are seeing this come back to a normalized state. It is not so much that the bottom is falling out or anything.”

As for his primary concerns, in regards to the services economy, while the Services PMI is in the low 50s, employment is what he called a “mixed bag,” due to right-sizing in the technology and information fields, which were overstaffed, as also was the case for online distribution, with these areas starting to correct themselves. And he also observed that wage pressures remain intact across various services sectors. 

“The economy looks good so far, but manufacturing is a bellwether, in that it leads into and out of recessionary periods,” he said. “I would like to see the sector increase more from where it is currently at right now. It serves as a lens, or an indicator, of what the future may have. And until the Federal Reserve hits its 2% [inflation] target, it is not going to pull off on rate increases. I am hoping that by the latter part of this year it gets to the point where it starts pulling back on those rates again.” 

Looking at the 2.2% increase in inventories, to 52.8, coupled with the March Inventory Sentiment reading up 2.6%, to 57.9, Nieves said that is an indication that panelists are saying that current inventory levels are up a little too high for their business requirements. 

“The reason for that is that there was a glut in certain products and a shortage in certain other products,” he said. “For the most part, they were trying to right-size their inventories, which is why there was a prior contraction. That included some leftover PPE stuff and other commodities that came in faster than companies were holding onto…just excess inventory. A panelist indicated inventory levels are now getting to where they need to be, with just a little bit of growth, from month-to-month, which is a good thing. I think we are in a good place inventory-wise.”

On a year-to-date basis, through the first quarter, Nieves said the services economy is in a good place, with the caveat that he would like to see that Services PMI reading up a little bit more. 

“It goes back to the cooling off of New Orders and the pullback we are seeing in the composite index,” he said. “Faster Supplier Deliveries impacted the Services PMI number. I expect to things up a little bit in April hopefully, but I am happy with where it is at. We would always like it stronger but it is in a good place, and we will have to see how it trends out. One month does not make a trend. We could not operate at the high levels we had in the past; it is just not sustainable.”