September 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 fell 1.2 points in August to 53.3 after climbing 4.9 points in July.  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 0.1 point in August to 51.5 after having gained 2.6 points in July.   According to Steve Miller, Chair of the Institute for Supply Management’s Business Survey Committee, “Ten industries reported growth in August. The Services PMI^® has expanded in 18 of the last 20 months dating back to January 2023, and the August reading is equal to the 51.5 percent index average for 2024.”  He added that, “For a second straight month, the slow growth indicated by the Services PMI^® reading was reinforced by panelists’ comments. Slow-to-moderate growth was cited across many industries, while ongoing high costs and interest-rate pressures were often mentioned as negatively impacting business performance and driving softness in sales and traffic. Although the Inventories Index increased by 3.1 percentage points into expansion territory in August, many respondents indicated their companies are still actively managing down their inventories.”

It appears that activity in the service sector seems to be slowing slightly.  At its current level the ISM group says that is consistent with 0.8% growth in GDP.

Comments from respondents include:  

• “Generally, business is good. However, there are concerns of slowing foot traffic at restaurants and other venues where our products are sold.” [Agriculture, Forestry, Fishing & Hunting]
• “Housing market continues to be dampened by higher borrowing costs. All segments of the industry are affected. Single-family homes for sale, build for rent, and multifamily units are all feeling the effects.” [Construction]
• “Activity is increasing.” [Finance & Insurance]
• “Business continues to be strong.” [Health Care & Social Assistance]
• “Overall business is improving.” [Information]
• “Hiring of employees, contractors and consultants continues to decline as companies look to control costs during a period of economic and political uncertainty. Employee layoffs continue across a broad range of companies and industries.” [Management of Companies & Support Services]
• “Business has slowed, and it is harder than ever to find talent, but less jobs available as well.” [Professional, Scientific & Technical Services]
• “Up in business and activity.” [Transportation & Warehousing]
• “Steady interest rates are impacting investment in nonregulated business silos.” [Utilities]
• “High food costs are impacting customer demand, and weak sales performance has resulted in negative growth overall. Business activity is stable, and supplier costs are generally flat.” [Wholesale Trade]

The orders component rose 0.6 point in August to 53.0 after having jumped 5.1 points in July..  After a big drop in June orders rebounded sharply in July and were steady in August..  Comments from respondents include: “Busy season” and “New service lines opening, with new sites of care coming online.”

The ISM non-manufacturing index for employment declined 0.9 point in August to 50.2 after having jumped 5.0 points in July to 52.4 after having fallen 1.0 point in June.  Employment activity in the services sector indicated growth in August for the second time in 2024, with five months of contraction following the previous expansion in January.  Seven industries reported an increase in employment in August   Comments from respondents include “Filling vacancies and replacing contractors across all disciplines” and “Hiring freeze in place; not backfilling positions as people are (laid off), retire, or leave our organization.”

The supplier deliveries component rose 2.0 points in August to 49.6 after having fallen 4.6 points in July .  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 faster delivery times in August.  Comments from respondents include: “Original equipment manufacturer (OEM) is in much better inventory and distribution shape” and “Shortage of truck drivers.”

Finally, the price component rose 0.3 points in August to 57.3 after climbing 0.7 points in July.  Thirteen 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 1.0% GDP growth in the third quarter in part because of a slower pace of inventory accumulation. followed by 1.7% GDP growth in the fourth quarter.

.Stephen Slifer

NumberNomics

Charleston, SC