October Services PMI hits a new all-time record, reports ISM

Growth in the services economy set a new all-time record in October, according to data in the most recent edition of the Services ISM Report on Business, which was issued this week by the Institute for Supply Management (ISM).

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—at 66.7 (a reading of 50 or higher signals growth)—topped September’s 61.9 by 4.8% and is the new all-time high. It also marks the fourth time in 2021 that a new record has been set, following July’s 64.1 reading, May’s 64 reading, and March’s 63.7 reading. The Services PMI grew for the 17th consecutive month, with services sector growth intact for 139 of the last 141 months.

The October Services PMI reading is 5.6% above the 12-month average of 61.1, with October representing the highest reading, for that period, and February’s 55.3 representing the lowest reading.

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

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

-business activity/production increasing 7.5%, to 69.8, growing, at a faster rate, for the 17th consecutive month and setting a new all-time high, with 17 sectors reporting growth;
-new orders up 6.2%, to 69.7, growing, at a faster rate and also setting a new all-time high, for the 17th month in a row, with 16 service sectors reporting growth;
-employment fell 1.4%, to 51.6, growing, at a slower rate, for the fourth straight month, which was preceded by five straight months of growth, with 12 services sectors reporting growth; and
-supplier deliveries, at 75.7 (a reading of 50 or higher indicates contraction), showed slowing, at a faster rate, for the 29th consecutive month, with 17 services sectors reporting slower deliveries

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

“Supply chain disruptions continue to roil new residential construction. Material and skilled labor shortages are lengthening cycle times and forcing substitutions,” observed a construction respondent.

An information sector respondent said that everything — from sales demand to orders to manufacturers, domestic and international — is ramping up.

“The international freight crisis is a critical problem, from capacity to transit times with port delays and costs now reaching three times pre-pandemic levels,” the respondent said. “Fourth-quarter holiday peak sales are at risk for delayed supply. Labor is still an issue, as it’s hard to find and get people who want to work, especially in services, trucking and warehouse fulfillment. Profitability outlook is down, thanks to rising costs, lower sales and reduced on-time supply.”

Tony Nieves, Chair of ISM’s Management Services Business Survey Committee said in an interview that there are various drivers for this new record-setting month, in the form of pent-up demand, and still-high consumer spending.

“But what really brought things up was demand coupled with restricted, or limited, supply,” he said. “We see that with the backlog or orders (up 5.4% to 67.3 for a new record-high) and the slowing deliveries and the whole cycle time with orders in general. The reason new orders and business activity are as up as they are is all related to the capacity constraints and high demand pushing forward orders in bigger quantities and more frequently, in the hopes of offsetting the lag in the supply chain disruption.”

And he added that it is kind of creating more of an issue, but companies have a mindset of not having enough of what they need and start planning and cannot replenish their inventories fast enough. It is not akin to a “panic buy,” as it had been on the retail side for things like paper products and chemicals, but also not too far removed from it.

October inventories fell 3.9%, to 42.2, contracting, at a faster rate, for the fifth consecutive month.

“It speaks to how companies are having trouble replenishing inventories fast enough,” said Nieves. “With the way they are being depleted, they cannot be filled fast enough.”

As for prices, which increased 5.4%, to 82.9, marking the highest reading since September 2005’s 83.5 reading, Nieves said that it could be viewed as a direct byproduct of the ongoing supply chain issues.

“That is also what the Federal Reserve is saying and why it categorizes it as ‘transitory, and it depends on how long transitory is,’” he said. “Transitory is being more correlated to a period of time versus what are the mitigating circumstances that are causing this. That being the pandemic, capacity constraint, and high demand. Pricing power is there. It is a direct supply and demand correlation. But there is also some wage pressure that is also causing increased prices, especially in a labor-intensive sector like services. We are going to see the cost of products and services, in this arena, stay strong. If we did not have the circumstances we have, we would not have as strong of a prices index as we are seeing. Initially, we thought it may be until the first or second quarter of 2022 until we see the disruption in the supply chain dissipating and high prices will remain through then. It will come down a little bit, I think, as the demand wanes. It is not that there is so much panic buying out there, because the consumer also has an appetite for spending right now, too. It is just the perfect storm as we look at everything.”

When asked how long it could be until current market conditions return to something more normalized, Nieves said that it may not be until the tail end of the third quarter in 2023.

“It is going to take a while for the labor resources and everything else to come into the mix and for demand to wane a bit,” he said.