Services sector sees continued growth in March, reports ISM

As was the case in February, March services economy activity saw a mild sequential decline while remaining on the right side of growth, 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 51.5 (a reading of 50 or higher signals growth), fell 1.2% in March, while growing, at a slower rate, for the 15^th consecutive month. This marks growth in 45 of the last 46 months, with December 2022 being the one month with a decline over that period. ISM added that the overall economy, like the March Services PMI, saw growth, at a slower rate, for the 15^th consecutive month as well.

The March Services PMI reading is 1.0% below the 12-month average of 52.5, 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 12 services sectors it tracks saw gains in March, including: Accommodation & Food Services; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Educational Services; Construction; Management of Companies & Support Services; Utilities; Retail Trade; Wholesale Trade; Other Services; Finance & Insurance; and Health Care & Social Assistance. The three sectors seeing decreases included: Mining; Transportation & Warehousing; Real Estate, Rental & Leasing; and Information.

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

• Business Activity/Production, at 57.4, up 0.2%, growing, at a faster rate, for the 46^th consecutive month, with 12 services sectors reporting growth;
• New Orders, at 54.5, down 1.7%, growing, at a slower rate, for the 15^th consecutive month, since contracting in December 2022, with 11 sectors reporting growth;
• Employment, at 48.5, increased 0.5%, contracting, at a slower rate, for the second consecutive month, with six sectors reporting growth;
• Backlog of orders, at 44.8, decreased 5.5%, contracting after two months of growth, with six sectors reporting growth;
• Supplier Deliveries, at 45.4, (a reading above 50 indicates slower deliveries), were off 3.5% from February, growing faster, at a faster rate, for the second consecutive month, with four sectors reporting slower deliveries;
• Prices, at 53.4, fell 5.2%, increasing, at a slower rate, for the 82nd consecutive month, with 13 sectors reporting higher prices; and
• Inventories, at 45.6, down 1.5%, contracting, at a faster rate, for the fourth consecutive month, with three sectors reporting growth

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

A Utilities sector panelist observed that lead times and supply are improving, but several strategic items remain difficult to procure. And a Retail Trade sector panelist said product supply chain is calm, and pricing is steady.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview, that this was a solid report.

“What pulled [the March Services PMI reading] back was employment and the improved efficiencies we are seeing in the supply chain and logistics,” he said. “There may be some slight waning in demand, but logistics is there and the fact remains that employment continues to be the mixed bag that it’s been for several months, with companies still having difficulty backfilling orders. It is a controllable expense and also the single largest variable expense, and companies are being cautious to see how the economy plays out and whether or not inflation stabilizes. That is the progression right now.”

Looking at the Services sector economic activity on a year-to-date basis, Nieves noted that ISM member panelists expect the second half of 2024 to be better than the first half, with the caveat it would not represent a huge uptick, as only minimal annual revenue gains were forecasted for the year, with solid margins and flat employment forecasted.

On the pricing side, Nieves noted that panelists comments ranged from still increasing to starting to see some stabilization.

“Fuel is a big driver and that's not going away anytime soon,” he said. “Increases on barrel prices are expected, too. I expect our pricing index to creep up next month, and we'll just have to see how that materializes. But I think overall food commodities are still volatile. There has been a lot of talk about the shrinkage and packaging and the President makes a big point of that, but we've been seeing that since the pandemic. That realization has come to light recently, but packaging size has been adjusted dramatically, and offsets the consumer psyche as it relates to the increased prices. But I think that, again, it just depends what happens down the road

When asked about the impact of the tragic events at the Port of Baltimore on services sector activity, Nieves explained there is likely an impact on tangible goods utilization, but it remains too early to tell if that is definitively the case. And he added that around 15,000 jobs have been impacted by this situation.

As for things that need to be monitored over the balance of the year, Nieves pointed to employment being at the top of the list.

“As employment goes is how this sector in the economy goes,” he said. “We are a labor-intensive sector and a labor-intensive economy.”