MNI INTERVIEW: Fed Rate Hikes Yet To Hit Services Prices-ISM

A decline in U.S. services prices to a two year-low is due to lower commodity prices rather than Federal Reserve's historic monetary tightening, which so far has not impacted pricing much, Institute for Supply Management services chair Anthony Nieves told MNI Thursday, suggesting interest rates will have to move higher.

The Fed's tightening "doesn't seem to be having much of an impact right now," he said. "It could be the lag but right now these interest rate increases haven't really impacted pricing all that much," he said.

"What's driving down our price index month-over-month has nothing to do with the rates. It's more about the cost of fuel and other commodities that are softening a little bit, while some others are sideways or up," he said, adding that China's reopening will likely put upward pressure on commodities.

Nieves said improved logistics, shorter lead times, and better capacity suggest China's reopening will not cause more problems in supply chains. "China's reopening will definitely help with pricing over time for sure," he said. The prices paid measure in February's ISM services report decreased by 2.2pt to 65.6, the lowest level since January 2021.

In the last quarter of 2022, Nieves told MNI he expected service prices to come down slowly and with a lag compared to manufacturing prices due to a longer cycle time through the supply chain. Those prices are holding up more than expected despite the Fed's historically fast tightening cycle, he said.

Still, firms are becoming more price sensitive and looking at costs more under a microscope, he said. "As long as we don't have any geopolitical interruptions, we should see pricing continue to come down into a realm of being back in the 50s," Nieves added.

STEADY GROWTH

The ISM services index decreased by less than expected in February, down 0.1ppt to 55.1. The composition of the report was mixed, with increases in the new orders and employment components, but a decline in the business activity component.

The figures do not indicate the U.S. economy is reaccelerating, he said. "I lean toward the view there is steady and incremental growth happening. Its not going to be huge spikes like we saw coming out of the pandemic."

"The services sector will continue to be in this mid-50 range moving forward," he said.

The new orders index rose 2.2ppts to 62.6 to the highest level since late 2021 in part due to China's re-opening. That leads Nieves to think the services industry will show strong activity next month, even though new orders will likely soften a touch in months ahead.

The 4.1ppt drop in business activity to 56.3 should be taken with a grain of salt, he said, because January's jump to 60.4 was skewed higher on December's "blip" of a report showing a surprising contraction.

The hiring index jumped 4ppts to 54.0, the highest reading since December 2021, but Nieves said it is not due to new labor demand. (See: MNI INTERVIEW: Employment Could Be Less Sensitive To Fed Hikes)

"It's more so on backfilling positions just based on the comments that have come in rather than just new openings and business growth," Nieves said, adding that he is not seeing evidence of labor hoarding.