MNI INTERVIEW: ISM Services Consistent With Below Trend Growth

U.S. service sector activity remains consistent with below-trend economic growth despite a pickup in November, and will likely stay moderate for the foreseeable future, Institute for Supply Management chair Anthony Nieves told MNI.

"With what the composite is right now, that would be 1% growth annualized," he said. "I think we're going to stay here and I don't think we're going to break past the mid 50s anytime soon but overall composite will continue to get a little better than just sideways here."

The Institute for Supply Management said Tuesday the services PMI rose to 52.7 in November, after hitting a five-month low of 51.8 the prior month. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy and has expanded for 41 of the last 42 months.

The business activity index rose 1.0-pt in November, while the employment index moved up 0.5-pt and the new orders index was unchanged. The prices gauge was little changed again at 58.3 in November and has been between 58 and 59 for four straight months.

"Going into the first quarter of 2024, it should look pretty good," Nieves said in an interview. "We'll move maybe sideways with a little bit of growth, but certainly I don't think we'll get strong pullback."

This appears to be a soft landing, he said, and even with high interest rates the economy will be able to maintain this growth for the sector and the overall economy.

WAITING FOR RATE CUTS

The Federal Reserve raised its policy rate by 525 basis points over 16 months to the current 5.25%-5.50% range to quell high inflation in the aftermath of the Covid pandemic. The FOMC has held rates steady since July.

Nieves said services growth will not break out higher until interest rates are lower. "I just hope that we start seeing lower interest rates. I think that will stimulate things. Companies are wary right now." (See: MNI INTERVIEW: Fed Could Cut Rates As Early As Q1 - Weinberg)

"There's this bit of uncertainty and so they're looking for a little bit of improvement before they start getting more aggressive about capital reinvestment," he said. "There's not a lot of pessimism but there is definitely concern and they're hoping things turn the corner and some are indicating that they see it in the first quarter."