Services economy turns in strong November performance, notes ISM

November services economy output turned in a solid performance, 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 56.5 (a reading of 50 or higher signals growth)—increased 2.1% over October’s 54.4, which was down 2.3% compared to September, growing, at a faster rate, for the 30th consecutive month, with services growth intact for 152 of the last 154 months through November. 

The November Services PMI is 0.7% ahead of thew 12-month average of 57.2 with December 2021 marking the high mark for that period, at 62.3, and October’s 54.4 marking the low (and is also the lowest Services PMI reading going back to May 2020’s 45.2.

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

The report’s equally weighted subindexes that directly factor into the NMI were mixed, from October to November, including:

-Business activity/production, at 64.7, rose 9.0%, growing, at a faster rate, for the 30th consecutive month with 13 sectors reporting growth;
-New orders, at 56.0, fell 0.5%, growing, at a slower rate, for the 30th consecutive month, following two months of sequential contraction preceded by 128 months of expansion, with 12 sectors growing;
-Employment, at 51.5, increased 2.4%, growing after contracting in October, which was preceded by two months of growth, with nine sectors reporting growth;
-Backlog of orders, at 51.8, fell 0.4%, growing, at a slower rate, for the 23rd consecutive month, with eight sectors reporting an increase;
-Supplier deliveries, at 53.8 (a reading above 50 indicates slower deliveries), were down 2.4% compared to November, slowing, at a slower rate, for the 42nd consecutive month, with nine services sectors reporting slower deliveries; and
-Prices, at 70.0, falling 0.7%, increasing, at a slower rate, for the 66th consecutive month, with 16 services sectors reporting growth

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

A retail trade respondent observed that business is stable, with employment low, and inflation lower month-to-month, adding that supply chain issues are stabilizing. And a construction respondent said that things were generally unchanged from month-to-month, adding that new business requests are solid, coupled with costs rising steadily for materials, meals, and lodging.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that the services economy remained in a good position in November, adding that any Services PMI reading coming in at 50 or above is a good number.

“The composite beat expectations, driven by the 9% gain in business activity, which is most likely attributed to how holiday season demand has not waned—and is still up a little bit—and the new fiscal period for government and administration,” he said. “Employment also drove the number up; we came from contraction territory to being up 2.4%, to 51.5. It is a mixed bag.”

Further addressing employment, he said that, for the non-farm payroll, retail jobs were down, Nieves said that ISM’s data focuses on directional change, for month-over-month.

“We have to look at it in totality, and the fact is that retailers said they added jobs for the holiday season,” he said. “Looking across the board, it is a combination of how companies are not able to backfill [positions] as much as they would like. They may have shown a downward trend in the past; it was not because they were laying people off, it was more about they could not get the workers they wanted.”

And he pointed to cutbacks in the IT industry, as well as cutbacks in for online distribution, which has leveled off since the peak of the pandemic, as it is not needed as much as it previously was.

When asked how the slight waning in inflation and also easing in gasoline prices is benefitting the services sector, he explained those are positive, and he added that the Federal Reserve raising interest rates at a less aggressive pace as in the past can work to stave off inflation.

“We—and the Fed—felt that that it [inflation] was transitory, and then it was demand-pull, and now it is still all about a combination of demand exceeding supply, even though capacity is coming back online, for the most part, there are still shortages in certain areas,” he said. “It is driving prices, and there is some [movement] in people trying to go with what the market will bear versus the actual supply and demand component.”

Looking at 2022 services sector activity on a year-to-date basis through November, Nieves said that it is important to note that it came off a 2021, which had some very strong pent-up demand-driven numbers, with things starting to normalize.

“I think that these Services PMI numbers we are seeing now in the mid-50s may come back down next month, or may be the same, or increase a little bit,” he said. “I don’t expect huge spikes for the composite for December. 2022 should finish fairly strong, and I think we will go back into the historic pattern, where we see a slight pullback in January as we always do post-holiday. And we have the potential, if February does not look good, that in the following months we may see a recession come on, but even if we do get into some contraction territory, we won’t see a deep, long tranche if we get into some kind of contraction or recessionary period.”