MNI INTERVIEW: ISM Services Bounce Is Durable, To Prod Fed

A U.S. services surge in January will likely prove durable as new orders will continue to drive growth, Institute for Supply Management chair Anthony Nieves told MNI Friday, adding that further interest rate hikes are likely needed to tame price growth.

The ISM services survey showed a jump in activity for January, with its headline composite increasing 6.0ppts from 49.2 to 55.2, above expectations of 50.5. New orders jumped 15.2ppts to 60.4 with eleven industries reporting growth, while business activity accelerated 6.9ppts to 60.4.

"With the high index reading for both new orders and business activity, we'll still be in the 52 to mid-50s range next month," he said in an interview, noting continuing cautious optimism from survey respondents. "I think mid-50s is sustainable."

Nieves previously warned last month's surprising fall in services was due to temporary weakness and would likely give way to a rebound. Still, the ISM chief was surprised by the strength and earlier timing of the bounce back.

"I was surprised that it came back as strong as it did," he said. But "I don't think we're going to contract anytime soon." Services contrasts with manufacturing, which contracted for the third month in a row in January and may not have hit bottom yet, according to ISM.

FED HIKES CONTINUING

Complicating the outlook, Nieves said continuing price growth means the Fed will likely have to raise interest rates further. The ISM service sector measure of prices remained high at 67.8, the seventh consecutive reading near or below 70. There were 14 commodities reported up in price, 6 reported down in price, and 12 reported to be in short supply.

Only 7.9% of respondents reported lower prices in January, while nearly 40% reported higher prices, according to the ISM survey.

"Until the prices on various items in those commodity groups moderate, I don't see the Fed really coming down off of the rate increases," he said. "No one likes the interest rates being high, but inflation is also a big challenge right now." (See MNI INTERVIEW: Fed May Need To Hike Again After Pause-Ireland)

The ISM survey has been picking up comments about shrinking margins, Nieves said. "But there's still certain things that we know chemicals, food products, electrical and electronic component, they're all very strong."

The employment index rose 0.6ppts on the month to 50.0, indicating that services payrolls held steady. But Nieves said labor retention is improving and wages are moderating. (See MNI INTERVIEW: US Labor Market Could Have Soft Landing-Paychex)

"I'm not seeing anything like I did in the past as far as increase of wages to retain employees back in," he said. Last year there were "comments about having pay incentives and signing bonuses and things of that nature. I'm not seeing that. I haven't seen that in months."