Services sector activity sees continued growth in February, ISM reports

Even with a mild sequential decline, services economy activity remained on a growth track in February, 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 52.6 (a reading of 50 or higher signals growth), fell 0.8% in February, while growing, at a slower rate, for the 14th consecutive month. This marks growth in 44 of the last 45 months, with December 2022 being the one month with a decline over that period. ISM added that the overall economy, like the February Services PMI, saw growth, at a slower rate, for the 14th consecutive month as well.

The February Services PMI reading is 0.2% above the 12-month average of 52.4, with August 2023’s 54.1 representing the high for that period and December 2023’s 50.5 marking the low for that period.

ISM reported that 14 of the 18 services sectors it tracks saw gains in February, including: Construction; Retail Trade; Public Administration; Health Care & Social Assistance; Accommodation & Food Services; Utilities; Professional, Scientific & Technical Services; Management of Companies & Support Services; Finance & Insurance; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Information; Educational Services; and Transportation & Warehousing. The three sectors seeing decreases included: Arts, Entertainment & Recreation; Mining; and Real Estate, Rental & Leasing.

The report’s equally weighted subindexes that directly factor into the NMI were mostly down from January to February, including:

• Business Activity/Production, at 57.2, up 1.4%, growing, at a faster rate, for the 45th consecutive month, with 13 services sectors reporting growth;
• New Orders, at 56.1, up 1.1%, growing, at a faster rate, for the 14th consecutive month, since contracting in December 2022, with 13 sectors reporting growth;
• Employment, at 48.0, decreased 2.7%, contracting for the second time in three months after growing in January, with six sectors reporting growth;
• Backlog orders, at 50.3, decreased 1.1%, growing, at a slower rate, for the second consecutive month, with five sectors reporting growth;
• Supplier Deliveries, at 48.9, (a reading above 50 indicates slower deliveries), were off 3.5% from January, growing, at a faster rate, after slowing in January, with three sectors reporting slower deliveries;
• Prices, at 58.6, were down from January’s 64.0, increasing, at a slower rate, for the 81st consecutive month, with 13 sectors reporting higher prices; and
• Inventories, at 47.1, down 2.0%, contracting, at a faster rate, with five sectors reporting growth

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

A construction panelist observed that business remains strong across the U.S. industrial construction sector, adding that construction materials levels have returned to pre-pandemic levels, with a strong 2024 outlook. And a retail trade panelist said that business conditions are good, with inflation under control and trending downward.

“Pricing of commodities is going up at a slower pace,” he said. “Manufacturing is good, with no sign of any change in the near future.”

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview, that the overall state of the services sector is solid, with ISM member panelist companies indicating business conditions are good, with new orders growth remaining intact, coupled with things like capital projects helping to drive growth. As for employment, he said that companies are still seeing staffing challenges, depending on the industry and finding workers.

“The services sector is seeing improved capacity with logistics improvements, as well as some disruption depending on the commodity and type of industry,” he explained. “We are seeing that in the Panama Canal with the water levels and also the ongoing issues in the Red Sea, and the conflict in the Middle East, with the disruption of containers going through there and some companies saying it is not impacting them as much, whereas, for other companies, it is an issue.”

Addressing inventories, Nieves said services-based companies are continuing to right-size and with the improved cycle time in the sector—with services being demand pull-focused—inventory levels are starting to come down, while still feeling “too high” on the sentiment side, when correlated to business levels.

“Overall, I think this is a very good report, considering that we are a little bit ahead of the trend based on traditional historic information,” said Nieves.

When asked if the services sector is on a solid growth track through the first two months of 2024, Nieves said that appears to be the case, with prospects for the second half of the year looking even stronger based on panelists’ sentiment, with the top three things he is monitoring over the remainder of the year, including: employment, interest rates, and real estate rental and leasing activity.