2021 Services Economy on the Right Side of Growth, Reports the Institute for Supply Management

December Services ISM Report on Business

While coming off of an all-time high in November, the December edition of the Services ISM Report on Business, which was issued yesterday by the Institute for Supply Management (ISM), finished 2021 on a strong growth path.

Read Report On Business® Roundup: December Services PMI®

The reading for the report’s key indicator - the Services PMI (formerly the Non-Manufacturing PMI) - at 62.0 (a reading of 50 or higher signals growth) - fell 7.1% compared to November’s all-time high reading of 69.1.

The Services PMI grew for the 18th consecutive month, with services sector growth intact for 141 of the last 143 months through December.

The December Services PMI is 0.5% below the 12-month average of 62.5, with November’s 69.1 and February’s 55.3 representing the high and low points over the last 12 months, respectively.

ISM reported that 16 of the services sectors it tracks saw gains in December, including:

Accommodation & Food Services;
Wholesale Trade; Construction;
Transportation & Warehousing;
Management of Companies & Support Services;
Retail Trade;
Other Services;
Health Care & Social Assistance;
Arts, Entertainment & Recreation;
Utilities; Professional, Scientific & Technical Services;
Public Administration;
Finance & Insurance;
Information;
Real Estate, Rental & Leasing; and
Educational Services.

The only industry reporting contraction in December is Mining.

The report’s equally weighted subindexes that directly factor into the NMI saw across-the-board declines in December, including:

business activity/production was down 7.0%, to 67.6, growing, at a slower rate, for the 19th consecutive month, with 16 sectors reporting growth;
new orders dropped 8.2%, to 61.5, growing, at a slower rate, for the 19th consecutive month, with 13 sectors reporting growth;
employment - at 54.9 - fell 1.6%, growing, at a slower rate, for the sixth consecutive month, with 11 sectors reporting growth; and
supplier deliveries - at 63.9 (a reading above 50 percent indicates slower deliveries) - seeing an 11.8% downward swing compared to November, slowing, at a slower rate, for the 31st consecutive month

Comments from ISM member respondents included in the report again pointed to myriad supply chain-related issues, including an uptick in transportation bottlenecks.

“Supply chain challenges to procure supplies for our restaurants remains our greatest obstacle at present, along with staffing needs,” said an Accommodation & Food Services respondent.

“We are considering another price increase after just one in 2021, in August.”

And a construction respondent said that the escalation in costs for materials, fuel, labor, lodging, and the like continues to negatively impact margins in an unsustainable direction.

Tony Nieves, Chair of ISM’s Management Services Business Survey Committee said in an interview that even with the Services PMI falling 7.0%, from November to December, November’s reading remains very strong, at above 60, and is following a record-high reading.

“The decline is not a gloom and doom thing, it is still a very strong rate of growth,” he said.

“We could not have maintained, or sustained that level of growth and set records every month. It is just impossible.”

When asked about the impact of the Omicron variant on the services economy, Nieves explained that it will be more apparent, in that from a timing standpoint, when Omicron first came in, it was closer to the tail end of December.

“It really has been more over the last two-to-three weeks that we have seen the impact of Omicron on businesses. I feel it is more of a temporary impact, as it relates to staffing levels, especially in customer-facing positions, in industries such as accommodations & food services, leisure, and retail. Those are the three areas in which we are seeing the most impact, and it is more of an interruption in service and more short-term. I don’t think the [Omicron] hospitalizations are near anywhere what we would see if this was the type of Covid we initially were dealing with two years ago. Unless there are going to be lockdowns, it is going to be more of a hindrance, or speed bump, than anything else. It is not going to have the long-term effect, but certainly, for the short window, we will see more of an impact in January’s numbers than what we have seen coming out of December.”

Looking at some specific metrics in the report, Nieves observed that the 8.2% decline in new orders still represents a good number, and like the Services PMI, could not be sustained at such a high level (December’s new orders reading was 69.7 an all-time high along with October 2021).

“There was a strong pullback, but it is still a very strong rate of growth. I think we are going to see some more slippage there, only because over the past two years there has not been a typical norm, which we see historically in the numbers. But I think it will move back a little bit to where we see that post-holiday pullback. It is just the way it is going to be, with demand waning a little bit. And as bottlenecks lessen in the supply chain, we will see backlog come down a little bit more, with supplier deliveries getting a little bit faster but not by much. Inventories can also hopefully be replenished, which alone would bring down some of the numbers we are seeing elsewhere. It is still going to be a good picture overall, and we will still have growth…based on what I am seeing right now with these numbers.”

December prices - at 82.5 - eked out a 0.2% increase, increasing, at a faster rate, for the 55th consecutive month, with all 18 services industries reporting an increase in prices paid during the month of December.

Nieves said it is unlikely the services economy-based prices will not decrease for at least another two-to-three months.

“It will go through the first quarter fairly strong but maybe not in that 80% range but could come down to low 70s or high 60s. There is still going to be increased pricing, and part of that is even though pricing is softening on the manufacturing side, you need to keep in mind that manufacturing prices are mostly upstream, for things like raw materials costs, it also has a trickle-down effect in the supply chain and does not get totally passed through. That is coupled with the fact that on the services side, you are also measuring price increases that are not associated with or correlated to, tangible goods, such as the labor side. These are the type of things that keep pricing at a higher level than what you are seeing in manufacturing.”

Looking ahead, Nieves said it is reasonable to expect to see the Services PMI in the low mid-50s-to low 60’s range in the coming months.

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