MNI INTERVIEW: OPEC Cuts A Headwind To Services - ISM

Institute for Supply Management services chair Anthony Nieves told MNI OPEC production cuts present a fresh headwind to the sector but he continues to expect moderate growth through the end of the year, while closely watching manufacturing as a lead indicator of a contraction.

"It will buffet prices for sure," he said, soon after OPEC announced an agreement for production cuts of 2 million bpd. "We need to see where fuel prices go." The ISM report suggested that price pressures declined in September, with the prices paid measure down 2.8pt and supplier deliveries dropping 0.6pt.

While he expects further moderation, Nieves acknowledged the divergence in prices paid measures in the manufacturing report at 51.7 versus services at 68.7. Manufacturing is "buying more on the raw material side. You're getting finished goods and services on the services side," he said. "It's being pulled through the supply chain with all the layers added to it and so it's going to definitely take longer for that to fall" in services.

The ISM services index declined 0.2pt to 56.7 in September, above expectations for a larger decline. The underlying composition was mixed, as the employment component increased 2.9pt to 53.0, but business activity was down 1.8pt to 59.1.

The report showed new export orders index increased by 3.2pt to 65.1. "It's telling us what companies see in the pipeline for them," he said, adding the subindex could soften in coming months to the mid to high 50s. "The cycle time is not as long as on the manufacturing side so it wouldn't be unrealistic to see that drop down."

WATCHING MANUFACTURING

Nieves expects the services sector to see moderate growth through the end of the year but said it is now harder to get clear economic signals from the data. "In the past we could see things seasonally, but the pandemic has kind of thrown seasonality a bit out the window," he said.

"For services, it's definitely showing that it's going to continue and yet I always look at manufacturing as the bellwether. In the past, they've always led into downturns in the economy and they've also led coming out of downturns in the economy. So, I'm keeping an eye on that." The ISM manufacturing report for September was weaker than expected and the weakest since May 2020 and chair Timothy Fiore told MNI the sector is slowing and could contract in coming quarters.

"If things change, the dynamics change, especially on the manufacturing side, and we see them going into contraction territory for a trend of three months then we have to really raise the antennae," Nieves said.

The services sector is holding up despite the Federal Reserve's historically fast tightening cycle this year, Nieves said, drawing comparisons to manufacturing. The service sector "just kind of weathers things differently," he said. "This is like a diverse stock portfolio. When you look at the services sector it is 18 industries that are very eclectic. It weathers change more so than what you see on the manufacturing side."