MNI INTERVIEW: ISM Sees Choppy But Resilient Service Growth

The U.S. service sector is set to keep growing steadily despite softer growth in March that was driven by further contraction in employment and faster delivery times, Institute for Supply Management services survey chair Anthony Nieves told MNI Wednesday.

"Overall we’ll continue to see this trend of incremental growth and hopefully the employment picture does pick up a little," Nieves said.

U.S. services activity expanded for a 15th straight month in March, according to the ISM survey, but the headline PMI came in at 51.4, 1.2 points lower than the previous month and below market expectations for a reading of 52.7. The employment index fell below the breakeven-50 level for the third time in four months at 48.5, and the supplier deliveries index extended its fall to 45.4 due to reduced demand and improved supply chain efficiency, Nieves said. Delivery times typically slow as customer demand increases.

"Employment continues to be the mixed bag it's been the last several months. Our respondents are indicating still having difficulties for some industries in backfilling positions, others are maintaining that single largest variable expense," Nieves said. "Even though activity looks good, they’re taking a cautious approach, not overstaffing or even staffing at this juncture."

Six industries -- accommodation and food services, construction, public administration, utilities, health care and education -- saw employment growth and reported having trouble backfilling positions. Another five sectors -- mining, finance and insurance, retail, transportation and warehousing and information -- saw contraction; and seven reported unchanged employment activity, the ISM said.

Firms told ISM they would reevaluate hiring plans as the weather warms up, as well as revising their outlook for the year. In December, respondents indicated they expected the second half of the year to improve over the first half, Nieves said.

SLOWER PRICE RISES

Prices paid for materials and services increased at the slowest rate since the pandemic. The prices index at 53.4 was "below expectations in the sense that people didn’t think pricing would reduce," Nieves said. "Prices are increasing, just at a much slower rate than what we’re accustomed to. We’re starting to see some stabilization in some categories."

Survey respondents still indicated inflation is a concern, Nieves said. The sector's reliance on overland trucking for distribution drives its costs, and with fuel prices rising, "I don’t anticipate seeing prices continue to go down," he said.

High interest rates continue to have an impact on real estate and capital reinvestment, Nieves said.

"Businesses are going OK. They'd like to see the rates come down. But when we look at this prices index as well as other criteria the Fed uses, I don't see them pulling the rates down anytime soon." (MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)