November 5, 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 backtracked by 2.7 points in October to 57.2 after having jumped 6.6 points to 59.9 in September.  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 rose 1,1 points in October to 56.0 after having climbed 3.4 points in September to 54.9.   According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “The increase in the Services PMI^® in October was driven by boosts of more than 4 percentage points for both the Employment and Supplier Deliveries indexes. The Business Activity and New Orders indexes both dropped by at least 2 percentage points. Each of the four subindexes are now above their averages for 2024. The Supplier Deliveries Index remained in expansion in October, indicating slower delivery performance. Concerns over political uncertainty were again more prevalent than the previous month. Impacts from hurricanes and ports labor turbulence were mentioned frequently, although several panelists mentioned that the longshoremen’s strike had less of an impact than feared due to its short duration.”

It appears that activity in the service sector climbed sharply in both September and October in the wake of the Fed’s initial rate cut.  At its current level the ISM group says that is consistent with 2.4% 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:  

“Material availability and delivery continues to improve. The port strike had an impact, as we had to divert shipments, but the overall costs are not material. Services cost remains elevated but easier to negotiate.” [Accommodation & Food Services]

“Monitoring inventories much closer than in the past. We’re refilling inventories for the fall and winter seasons are lower level than normal, but those decisions are easy to understand.” [Agriculture, Forestry, Fishing & Hunting]

“Business is good. Building backlog. Commercial Construction is strong. Commercial Service is busy. All other areas are level.” [Construction]

“Hurricane Helene seriously damaged an IV production plant in North Carolina, which was 60 percent of all national supply of IV bag fluid/solution. We are now starting to experience shortages. In addition, two hurricanes hit Florida, which impacted many of our lab vendors. Plus, the port workers’ strike impacts shipments of materials that our (U.S.) labs use to manufacture medicine and medical supplies. We anticipate a rise in prices and longer wait times, and most likely, shortages of some supplies.” [Health Care & Social Assistance]

“Sadly, the recent hurricanes/tornadoes, and any future climate-related catastrophes, are good for the equipment sales and rental businesses. That and the continued infrastructure spending.” [Information]

“Revenue cycles are lengthening. Good sales, but longer service periods. Commodity pricing is stabilizing as inflation concerns ease. Business is in a steady state, with everyone holding an even keel awaiting U.S. election results.” [Professional, Scientific & Technical Services]

“Hurricane impacts have affected supplier deliveries.” [Real Estate, Rental & Leasing]

“Port strikes did not impact our supply chain, but we confirmed all our strategic vendors had plans in place should they have an impact.” [Retail Trade]

“Business is booming, nothing slowing down. Prices continue to increase slightly.” [Utilities]

“The economy is still causing issues within our business and that of our suppliers.” [Wholesale Trade]

The orders component fell 2.0 points in October to 57.4 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.  After a big drop in June orders have climbed sharply in the past four months. Comments from respondents include: “More construction requests” and “Slightly lower due to holding back funds until after the U.S. presidential election.”

The ISM non-manufacturing index for employment jumped 4.9 points in October to 53.0 after having declined 2.1 points in September to 48.1.   Nine industries reported an increase in employment in October   Comments from respondents include  “Hiring seasonal labor for holiday peak activity” and “We have lost employees due to normal attrition and are having issues backfilling these positions.”

The suppler deliveries component rose 4.3 points in October to 56.4 after climbing 2.5 points in September to 52.1.  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 slower delivery times in both September and October.  Comments from respondents include: “Deliveries are impacted by the recent hurricanes” and “Data is coming from government agencies, which are swamped with the elections.”

Finally, the price component fell 1.3 points in October to 58.1 after having risen 2.1 points in September to 59.4.  It turns out that 18 of the last 19 months have been below 60.  Fifteen 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 got 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