July 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 plunged 6.5 points in April to 50.9 after rising 0.2 point in March. 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. If that is the case, the service sector appears to have taken a hit in April. It has been the source of growth in the economy for the past several years but this month’s result suggests that the service sector may, finally, be running out of steam.
The composite index fell 5.0 points in June to 48.8. This is the second time in three months that the index has fallen below the breakeven level of 50.0. According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020 and continued contraction in employment. Survey respondents report that in general, business is flat or lower, and although inflation is easing, some commodities have significantly higher costs. Panelists indicate that slower supplier delivery performance is due primarily to transportation challenges, not increases in demand.”
It appears that activity in the service sector seems to be slowing. At its current level the ISM group says that is consistent with no change in GDP growth.
Comments from respondents include:
- “Sales and traffic remain soft compared to last year. High gas prices in California and constant news about inflation and restaurant menu prices are culprits.” [Accommodation & Food Services]
- “Costs seem to have stabilized but are still higher. The company is holding steady to see what the election will hold.” [Construction]
- “Currently, our operations are normal, but we are experiencing slightly higher costs due to the increase in fuel. We are at the end of our fiscal year, when an increase in expenditures is typical.” [Educational Services]
- “Steady, with no major shifts in pricing or availability of services.” [Finance & Insurance]
- “Demand for services has moderated after near-record patient levels in the last month.” [Health Care & Social Assistance]
- “We are still experiencing supply chain challenges with the increased cost of chemicals, as well as the domestic and overseas freight costs associated with them.” [Management of Companies & Support Services]
- “Slightly higher prices across the board, but less pricing pressure for some items. Still long lead times for heavy equipment, fire apparatus, ambulances and the like.” [Public Administration]
- “Inflation continues to be a general concern for both purchasers and sellers. For example, with inflation continuing, will customers have enough discretionary funds to spend?” [Retail Trade]
- “Supply issues have calmed down. Prices on many products remain high, with no sign of decreases.” [Utilities]
- “Market seems to be slowing in June. This is complicated by increased ocean freight rates and tight container bookings.” [Wholesale Trade]
The orders component declined 6.8 points in June to 47.3. Ten industries reported growth of new orders in June. The index indicated contraction for the first time since December 2022, with 30 straight months of growth before that. Comments from respondents include: “Company starting to grow again” and “Slowing of traffic to the stores.”
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The ISM non-manufacturing index for employment fell 1.0 point in June to 46.1. Five industries reported an increase in employment in June. Comments from respondents include ““We continue to deploy automation” and “Business remains steady in a very tight labor market.”
The supplier deliveries component fell 0.5 point in June to 52.2 . 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 June at roughly the same pace as in May. Comments from respondents include: “Had some delays in deliveries due to recent bad weather events” and “Having trouble booking containers.”
Finally, the price component fell 1.8 points in June to 56.3. Thirteen service sector industries reported an increase in prices paid during the month. Prices are still rising 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 and the Fed initiated a series of interest rate hikes. Meanwhile, the service sector was expanding at a robust pace. However, recent data suggest that the service sector has finally begun to experience some softness. We are looking for 2.6% GDP growth in the second quarter as firms continue to hire, wages continue to climb, and consumers continue to spend, but we then expect growth to slip to 1.5-2.0% in the second half of the year.
.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