ISM Services PMI notches third straight month showing expansion

Economic activity in the services sector grew for the third straight month in August, according to the Services ISM Report on Business (formerly the Non-Manufacturing Report on Business), which was issued today by the Institute for Supply Management.

The report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—slipped 1.2%, to 56.9, in August (a reading of 50 or higher indicates growth is occurring). This came on the heels of a 1% gain to 58.1, in July and an 11.1% gain, to 57.1, in June, which halted a two-month stretch of declines, and was preceded by 122 consecutive months of expansion. ISM noted that June marked the largest single-month percentage increase, for the NMI, going back to its inception in 1997.

The August Services PMI is 3.5% above the 12-month average of 53.4, with the highest reading over that span being July’s 58.1 reading and the lowest being April’s 41.8.

ISM reported that 15 of the 18 non-manufacturing sectors it tracks saw gains in August.

The report’s equally weighted sub indexes that directly factor into the NMI were mixed in August, including:

  —business activity/production down 4.8%, to 62.4 growing, at a slower rate, for the third straight month, with 13 sectors reporting growth for the month;
  —new orders were down 10.9%, to 56.8, growing at a slower rates, for the third straight month;
  —employment headed up 5.8%, to 47.9, contracting, at a slower rate, for the sixth month in a row; and
  —supplier deliveries, at 60.5 (a reading of 50 or higher indicates contraction), slowed at a faster rate for the 15th consecutive month.

Other notable metrics in the report included: a 6.2% decline in inventories, to 45.8, down after two months of growth; a 6.6% increase in prices, to 64.2, increasing at a faster rate for the fifth consecutive month; and backlog of orders, at 56.6, eking out a 0.7% increase, growing, at a faster rates, for the third consecutive month.

Comments in the report submitted by ISM member respondents continued to reflect the ongoing challenges being presented by the COVID-19 pandemic, while business conditions are seeing some gains.

“Our business activity is now thriving again, after modifications to our operations. While supply disruptions remain common, very critical items are more stable than in previous months,” said an Accommodation & Food Services respondent. “Tariff threats have caused more concern than in previous months due to actions in aluminum, and the rapid rise in lumber costs for construction expansions.”

In an interview, Tony Nieves, Chair of the ISM’s Services Business Survey Committee, noted that August was a strong month for the services sector, considering that conditions were at such a strong level in July.

“This data shows what could be viewed as a leak, so to speak, but it is hard to stay in the rarified air [for certain metrics in the report] forever,” he said. “As we start to see businesses reopen, they are not at 100% capacity. In parts of California, salons, barbershops, and personal care services are only opening up at 25% capacity. We are going to see activity increase month-over-month going forward, but it won’t be at such a high level because of the restrictions that are in place. The protocol[s] do limit the true potential of growth, and also affects not only the business activity and new orders, as businesses are starting to reopen in a limited fashion and are going to expand their current levels in a limited fashion, which also correlates as to why we are seeing a lag in the employment index.”

The reason for the lag in the employment index relates to variable payroll expenses, coupled with companies not being at 100% capacity and not bringing back 100% of their workers.

“Even though jobs reports indicate jobless claims are at less than a million, month-to-month, we are still seeing growth in that, and that is what we are seeing the continued [employment] contraction,” he said.

When asked about the potential for weekly unemployment benefits, going down from $600 to $300 per week, in terms of having a negative impact on services’ output, Nieves said that, interestingly, one of the strengths of the August report was the increase in consumer activity, but that comes with a caveat.

“In the past, people that were staying home, whether it be for safety reasons or remaining cost-neutral with the unemployment benefits…is going to, I think, put people back into the workplace, hopefully,” he said. “With the decline in COVID-19 cases and a potential vaccine on the horizon, hopefully that will stimulate some business activity, as well as a better employment picture. It just remains to be seen as they are so interrelated, especially in services. As the employment index goes, that is how the sector goes. It is so labor-reliant and labor-intensive.”

When asked about the continued slowing of supplier deliveries in August, Nieves said that it is more capacity-related while also related to the pandemic, but at a reduced level for the latter.

“This is more about straight supply and demand, whereas, in the past, with supplier deliveries, it was more of a matter of not having enough trucks, due to logistics issues,” he said. “Now, there is still some of that in place, but it is just more capacity-related, as there is just not the output right now from some places to get the deliveries out fast enough.”

As for reduced inventory levels, Nieves said that because of the spike in inventories in recent months, there was a burn off of some of the excess inventories, and now inventories need to be replenished, which could portend an uptick in September inventory levels.

Looking ahead, Nieves said it is reasonable to expect to see gains, in the services sector, over the next few months.

“As we see the decrease in COVID-19 cases, which has [led] to some businesses reopening, as much as whatever the political injection is, from one side or the other, I think that everyone wants to see this economy picking up,” he said. “The current administration is going to pull out all stops they can leading up to the election.”