October 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 jumped 6.6 points to 59.9 in September after declining 1.2 points in August. 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 is still comfortably above the breakeven level of 50.0.
The composite index rose 3.4 points in September to 54.9 after climbing 0.1 point in August. According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “The increase in the Services PMI in September was driven by boosts of more than 6 percentage points for both the Business Activity and New Orders indexes. The Employment and Supplier Deliveries indexes had mixed results, with a 2.1-percent decrease and 2.5-percent increase, respectively. The Supplier Deliveries Index returned to expansion in September, indicating slower delivery performance. The stronger growth indicated by the index data was generally supported by panelists’ comments; however, concerns over political uncertainty are more prevalent than last month. Pricing of supplies remains an issue with supply chains continuing to stabilize; one respondent voiced concern over potential port labor issues. The interest-rate cut was welcomed; however, labor costs and availability continue to be a concern across most industries.”
It appears that activity in the service sector climbed sharply in September in the wake of the Fed’s initial rate cut. At its current level the ISM group says that is consistent with 1.9% growth in GDP.
Comments from respondents include:
- “Overall, economic factors are somewhat stable in the last month. Volatility was limited, based more on seasonal aspects than geopolitical issues or election season. That stability may be short-lived due to looming port labor issues heading into October.” [Accommodation & Food Services]
- “Business has been flat over the past three to six months, with concerns over growth in the near term.” [Agriculture, Forestry, Fishing & Hunting]
- “Housing construction continues to struggle with high interest rates. While the recent half-point cut is encouraging, it may take another 150 basis points to move the needle in sales. Labor and heating, ventilation and air conditioning (HVAC) regulations continue to be a drag on construction last month.” [Construction]
- “Interest rates in both the housing and auto markets have been steadily declining, leading to a slight increase in auto and home loan applications.” [Finance & Insurance]
- “Back orders from manufacturers have increased, resulting in supply constraints.” [Health Care & Social Assistance]
- “New projects have not been consolidated in the U.S., which has led my organization to cut costs, especially by dismissing employees from departments with a lower activity volume.” [Information]
- “There is concern over the economy, and it feels like a lot of people are waiting to see which way the election goes in November before making a solid plan for 2025 and beyond.” [Professional, Scientific & Technical Services]
- “Prices remaining mostly steady, with a significant increase in fiscal year-end spending.” [Public Administration]
- “Starting to see positive year-over-year change in sales. Slow but steady.” [Retail Trade]
- “Sales have slowed a bit, with customers possibly holding back on new projects and awaiting the outcome of the presidential election.” [Wholesale Trade]
The orders component surged by 6.4 points in September to 59.4 after rising 0.6 point in August to 53.0 after having jumped 5.1 points in July.. That is the highest level for this component since February 2023. After a big drop in June orders have climbed sharply in the past three months. Comments from respondents include: “Busy season” and “New service lines opening, with new sites of care coming online.”
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The ISM non-manufacturing index for employment declined 2.1 points in September to 48.1 after declining 0.9 point in August Six industries reported an increase in employment in September Comments from respondents include “Employees leaving, and it’s tough to find new ones” and “Head count, open positions and employee retention is about the same month over month.”
The supplier deliveries component rose 2.5 points in September to 52.1 after having climbed 2.0 points in August. 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 slightly slower delivery times in September versus somewhat faster deliveries in August. Comments from respondents include: “Less supply and logistics constraints, with increased availability of materials” and “Slightly lower at 96 percent of purchase orders received on time versus 97 percent the previous month.”
Finally, the price component rose 2.1 points in September to 59.4 after having risen 0.3 points in August. Twelve 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 are looking for 2.0% GDP growth in the third quarter followed by 2.5% GDP growth in the fourth quarter.
.Stephen Slifer
NumberNomics
Charleston, SC
Steve –
How can the long bond interest rate remain immune to the very broad based
increases in wages, prices, and inflation? What is the specific linkage between prices
and long bond rates? The data you present seems to indicate that significant
inflation into the latter part of 2021 and 2022 is inevitable, and it’s unclear how
transient it will be.
Hi Frank,
Bond yields are influened by expectations about what is going to happen as much as what is actually going on. Powell says the current pickup in inflation is temporary and that by next year it will drop back to 2.0%. Let’s assume he is right. That means that for the next decade the real rate for the 10-year will be -0.7% (1.3% – 2.0%). In the past decade it has averaged +0.5%. In my world if inflation averages 3.7%, that would make the real 10-year average -2.4%. That is not sustainable. Who in their right mind wants to own a bond that yields 1.3% when its purchasing power is declining by 2.4%. Keep in mind, too, that the Fed is purchasing $120 billion of bonds per month. By the end of this year or early in 2022 the Fed will cut back. Seems almost inevitable that once that starts it will push bond yields higher. Then, with each passing month that inflation does not abate, that should contribute to additional upward pressure on bond yields. To me, a 1.3% 10-year rate is unsustainable.
Steve