December 3, 2024

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of service sector firms.  The business activity index declined 3.5 points in November to 53.7 after backtracking by 2.7 points in October.  We tend to focus on the business activity component as a measure of “production” because it seems to track better with the pace of economic activity.  It has softened during the course of the past year, but this index jumped sharply in the past two months.

The composite index fell 3.5 points in November to 52.1 after having risen 1.1 points in October.   According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee,“The decrease in the Services PMI^® in November was driven by decreases in each of the four directly impacting subindexes (Business Activity, New Orders, Employment and Supplier Deliveries). However, 14 industries reported business activity growth, and 13 indicated new orders expansion; both figures are improvements compared to October. This reinforces the view over the last several months that the services sector has returned to sustained growth. Generally, respondents’ comments were neutral to positive, and both positive and negative impacts were attributed to seasonality. Not surprisingly, election ramifications and tariffs were mentioned often, with cautionary outlooks related to the potential impact on respondents’ specific industries.”

It appears that activity in the service sector climbed sharply in both September and October but backtracked somewhat in November as concern about the new administrations tariffs and policy measures held down the index.  At its current level the ISM group says that is consistent with 1.0% growth in GDP.  After climbing 2.8% in the third quarter we expect GDP growth in the fourth quarter of 2.5%.

Comments from respondents include:  

• “Federal Reserve interest rate cuts have not had the desired effect on mortgage rates yet. With election results mostly determined, expansion of residential construction is anticipated, but the unknown effect of tariffs clouds the future.” [Construction]
• “All operations are normal at the moment. Nothing local or national that is having any major effect on our operations.” [Educational Services]
• “Higher level of activity is driving the need for additional resources.” [Finance & Insurance]
• “We have concern after the presidential election that tariffs will affect prices for electronics and components in 2025.” [Information]
• “Domestic lead times still seem very long. We are having to go to China for many electrical equipment requirements. Even after tariffs, the price is half, and so are the lead times.” [Management of Companies & Support Services]
• “Election results and the potential tariff changes would impact inventory and lead to higher prices in the hospital supply chain. What we saw during COVID-19 with startup U.S. production is a warning sign again.” [Professional, Scientific & Technical Services]
• “Construction materials are shorted or hard to get due to increased construction projects in the area and (in the) U.S. Sometimes projects are delayed due to this.” [Public Administration]
• “We finished a solid quarter and are planning on a similar holiday period. Not breaking any records, but positive.” [Retail Trade]
• “Still waiting to see how presidential cabinet picks shake out, if they are confirmed and how they will affect our operations going forward. Holding capital projects now until the cabinet is complete and we know how federal funds will be dispersed going forward.” [Transportation & Warehousing]
• “Even though we are reducing our spending and our employment levels, we have a positive outlook for 2025 performance with expected reinvestment of funds.” [Utilities]

The orders component fell 3.7 points in November to 53.7 after declining 2.0 points in October after having surged by 6.4 points in September to 59.4. The September level was the highest level for this component since February 2023.  Comments from respondents include: “End of calendar-year elective procedures for insurance/medical savings accounts” and “We are already seeing some end-of-year softness.”

The ISM non-manufacturing index for employment declined 1.5 points in November to 51.5 after having jumped 4.9 points in October.   Five industries reported an increase in employment in November   Comments from respondents include “Actively filling open positions” and “Hiring freeze in place; not backfilling positions as people retire or leave the company.”

The suppler deliveries component dropped 6.9 points in November to 49.5 after having risen 4.3 points in October and 2.5 points in September.  This component is reversed in the sense that a reading above 50 percent indicates slower deliveries to service sector firms, while a reading below 50 percent indicates faster deliveries. Thus, firms reported faster delivery times in November versus slower delivery times in September and October.  Comments from respondents include: “Materials and components more readily available to our manufacturers” and “Many items are on allocation and are being substituted.”

Finally, the price component rose 0.1 point in November to 58.2 after having fallen 1.3 points in October.  It turns out that 19 of the last 20 months have been below 60.  Fourteen service sector industries reported an increase in prices paid during the month.  Prices continue to climb at a moderate rate in the service sector.

The manufacturing sector of the economy has contracted since November of 2022 as inflation has continued to climb at a much faster than desired pace.  However, the service sector continues to expand at a respectable pace.  We saw GDP growth of 2.8% in the third quarter and we expect 2.5% GDP growth in the fourth quarter.

.Stephen Slifer

NumberNomics

Charleston, SC