May 4, 2022

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 service sector business activity (production)  index jumped 3.6 points in April to 59.5 after having risen 0.4 point in March.  However the index had fallen nearly 20 points in the three months prior to Fed as inflation soared and the Fed indicated they were prepared to initiate a series of interest rate hikes.

Seventeen of 18 service industries reported growth in March. The ISM group says that its current level of 59.1 is consistent with GDP growth of 2.5%.

Anthony Nieves, Chair of the ISM’s Business Survey Committee said, “Growth continues for the services sector, which has expanded for all but two of the last 147 months. There was a pullback in the composite index, mostly due to the restricted labor pool (impacting the Employment Index) and the slowing of new orders growth. Business activity remains strong; however, high inflation, capacity constraints and logistical challenges are impediments, and the Russia-Ukraine war continues to affect material costs, most notably of fuel and chemicals.”

Comments from respondents include:

“Pricing pressures and product availability issues continue to be extremely problematic.” [Accommodation & Food Services]

“Mortgage rates have skyrocketed. While relatively low from a historical perspective, the new rates — combined with historically high home prices — will temper new home demand at some point over the next 12 months.” [Construction]

“Overall business has softened.” [Information]

“Business remains strong, only dampened by shortages in labor, increased material costs and lengthy lead times.” [Management of Companies & Support Services]

“Talent shortages continue to make it difficult to get work done at companies across many industry sectors. Light industrial labor is in high demand, but supply gaps still exist. Wages continue to rise in nearly all labor categories, contributing to the rise in prices of goods and services.” [Professional, Scientific & Technical Services]

“Inflation, supply chain issues and access to qualified workers continue to be issues. There are still lingering effects from the pandemic, although those seem to be subsiding. The future impacts of the war in Ukraine are unclear.” [Public Administration]

“Continued delays due to supply chain logistics issues; increased pricing across the board.” [Retail Trade]

“Fuel and chemicals continue to go up in price.” [Utilities]

“Cost pressures beginning to slow demand.” [Wholesale Trade]

The ISM non-manufacturing index for employment fell 4.5 points in April to 49.5 after having risen 5.5 points in March.  Ten industries reported an increase in employment in April. Five industries reported a decline. Comments from respondents include: “Job openings exist, but finding talent to fill them remains a struggle across most industry sectors and job categories” and “Demand for employment remains hypercompetitive; there is just not enough qualified personnel available.”

The supplier deliveries component rose 1.7 points in April to 65.1 after having fallen 2.8 points in March.   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 are reporting slow deliveries in April, and they are slowing at a somewhat faster pace than in March.   Demand in the service sector is extremely strong, but firms are unable to muster a similar-sized increase in production. Comments from respondents include: “Job openings exist, but finding talent to fill them remains a struggle across most industry sectors and job categories” and “Demand for employment remains hypercompetitive; there is just not enough qualified personnel available.”

Finally,  the price component rose 0.8 point in April to 84.6 after having risen  0.7 point in March.  Prices are rising rapidly.  . All 18 of 18 service sector industries reported an increase in prices paid during the month.  This index is showing no sign of retreating any time soon.

The manufacturing and non-manufacturing sectors of the economy have softened a bit in recent months as inflation has soared and the Fed has initiated the first two of a series of interest rate hikes.  We are looking for 2.0% GDP growth this year as the Fed appears to have quickened the pace of tightening.

.Stephen Slifer

NumberNomics

Charleston, SC