Despite small decline, Services economy remained strong in April, notes ISM

Services sector economic growth remained very strong, for the month of April, according to the Institute for Supply Management’s (ISM) Services ISM Report on Business, which was issued today.

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 62.7 (a reading of 50 or higher indicates growth is occurring) in April. This marks a 1.0% decline from March’s 63.7, which was the highest reading since October 2018’s 60.9, and marks the eleventh consecutive month of services sector growth, at a slower rate. Services sector growth has seen gains in 133 of the last 135 months.

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

The report’s equally weighted subindexes that directly factor into the NMI were mixed in April, including:
-business activity/production increased fell 6.7%, to 62.7, coming off of its highest reading ever since ISM started collecting this data in 1997, at 69.4, growing, at a slower rate, for the eleventh straight month, with 17 sectors reporting growth;
-new orders fell 4.0%, to 63.2, also following an all-time high reading, of 67.2, in March, growing, at a slower rate, for the eleventh straight month, with 17 services sectors growing; 
-employment increased 1.6%, to 58.8, growing, at a faster rate, for the fourth consecutive month, with 11 services sectors reporting growth; and
-supplier deliveries, at 66.1 (a reading of 50 or higher indicates contraction), slowing, at a faster rate, for the 23rd consecutive month

Comments in the report submitted by ISM member respondents again reflected concurrent themes of business-related issues and the ongoing COVID-19 pandemic.

An accommodation & food services respondent said that restaurant capacity is increasing quickly as restrictions are removed.“Consumers have pent-up demand; sales are increasing, and the labor pool is tight,” he said. “Supply chain is challenged at every level as businesses across the U.S. ramp up.”

And an agriculture, forestry, fishing & hunting respondent noted that delays in container deliveries are impacting business.

“Even with the decline, this is still a really good report, with the Services PMI remaining above 60,” said Tony Nieves, chair of the ISM’s Services Business Survey Committee, in an interview. “The question really becomes ‘how long can you sustain that level of growth?’ There was pent-up demand, which is like opening up the floodgates, with most of the water coming out really fast, at first, and then it starts kind of trickling down. That is where we are right now. We will still see continued growth but to stay in the mid-to-upper 60s, it is just not reasonable to expect something like that.”

With the gain in employment less than 2%, Nieves said that figure will ease in over time, as there still remains a shortage of workers, noting were the labor pool larger, there would be a higher level of growth.

As for the nearly 5% decrease in inventories, he attributed it to a “burning off” of inventories, albeit not based on the effort to burn it off, but, instead, it was due to increased demand, coupled with capacity constraints related to depleting inventories and filling orders. As an example, he pointed to PPE equipment, in that demand has gone down, with inventory for that segment being burned off.

The 5.5% gain in backlog of orders, according to Nieves, reflects the trio of inventories, deliveries, and backlog all being interconnected.

“It all has to do with supply, demand, and capacity,” he said. “Right now, there are still capacity challenges, as well as logistics challenges, port and overland trucking issues, too. Rail deliveries are slow, too. There is a litany of things disrupting the supply chain right now.”