October Services PMI sees growth, says ISM

Economic growth in the services sector remained intact for the fifth consecutive month, 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 (ISM).

The report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 56.6 (a reading of 50 or higher indicates growth is occurring), in October, following a 0.9% increase in September, a 1.2% August decline, and a 1% gain in July.

The October Services PMI is 2.6% above the 12-month average of 54.0, with the highest reading over that span being July’s 58.1 reading and the lowest being April’s 41.8. Services sector growth has seen gains in 127 of the last 129 months, with the exception of May and June of this year.

ISM reported that 16 of the 18 non-manufacturing sectors it tracks saw gains in October, including Transportation & Warehousing; Construction; Accommodation & Food Services; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Educational Services; Finance & Insurance; Management of Companies & Support Services; Wholesale Trade; Mining; Professional, Scientific & Technical Services; Utilities; Retail Trade; Real Estate, Rental & Leasing; Information; and Other Services. The two industries with October decreases were Arts, Entertainment & Recreation and Public Administration.

The report’s equally weighted sub indexes that directly factor into the NMI were mixed in October, including:
-business activity/production down 1.8%, to 61.2 growing, at a slower rate, for the fifth straight month, with 16 sectors reporting growth for the month;
-new orders were down 2.7%, to 58.8, growing at a slower rate, for the fifth straight month, with 15 services sectors growing;
-employment fell 1.7%, to 50.1, growing, at a slower rate, for the second straight month, which was preceded by a six-month stretch of declines; and
-supplier deliveries, at 56.2 (a reading of 50 or higher indicates contraction), slowing at a slower rate for the 17th consecutive month

Other notable metrics in the report included: a 4.3% gain in inventories, to 53.1 up after two months of declines; a 4.9% uptick in prices, to 63.9, increasing at a faster rate for the seventh consecutive month; and backlog of orders, at 54.4, up 4.3%, growing, at a faster rate, for the fifth consecutive month.

Comments in the report submitted by ISM member respondents reflected concurrent themes of cautious optimism and ongoing concern over the ongoing COVID-19 pandemic.
An Accommodation & Food Services respondent said business has improved, but it is greatly reliant on COVID-19-related restrictions.

“Supplier’s inventories and lead times are longer and spotty with outages due to keeping lead times lean as a cash flow measure, but putting consistent supply at risk,” he said.

And a retail trade respondent explained that her company continues to be cautiously optimistic that the rebound in business that began in July continues to sustain.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that he was pleasantly surprised that the October numbers came in as strong as they did.

“We thought there would be a little month of pullback month over month, still reflecting growth but not as strong as it is, because it was coming from rock bottom,” he said. “And we then went for four consecutive months of growth, and September was very strong, so I thought there might be just a little bit of pullback, just because of the curve flattening a little bit.”

With key metrics like Business Activity/Production and New Orders showing sequential declines while still growing, Nieves observed that they serve as examples of the many variables that the economic recovery is, and will continue to be contingent on, including things like the weather, as winter approaches; any potential rise in COVID-19 cases and hospitalizations, which will impact the pace of the recovery.

When asked about the recent employment declines, Nieves said that is related to some of the same aforementioned variables related to the overall economy.

“This is a labor-intensive sector, and [employment] is nowhere near pre-pandemic levels,” he said. “That is going to affect the employment picture. Where we are seeing the majority of shortages is in the construction sector, which was ongoing pre-pandemic and has since been exacerbated.”

Election impact: In terms of how the results of the election could impact the services economy, Nieves noted that they should be viewed as two different types of administrations, with differing philosophies, in regards to how things may pan out, relative to the economy and the pandemic.

“Historically, one administration has affected the stock markets differently than the other one based on looking at the past recession,” he said. “We had 1.2% GDP growth coming out of the last recession for years, and then it went high. Whether it was smoke and mirrors or not, it was definitely a positive impact on the economy and the markets as well. It is going to be interesting to see how the election ends up…and we will then see things be impacted accordingly.”

Looking at the coming months, Nieves said a Services PMI reading of 55 or above would be welcomed, given the variables that can come into play like weather and the pandemic, among others.

“I don’t anticipate things opening up broadly within the next 30-to-60 days,” he said. “Some, like where I am in California, are holding back, whereas Florida has opened way up.”