MNI INTERVIEW: US Service Prices May Have Peaked - ISM Chief

U.S. service sector prices could be past their peak as commodity and diesel costs fall and critical transportation price pressures ease, Institute for Supply Management services survey chief Anthony Nieves told MNI Wednesday, adding he expects growth to moderate through the year.

"All indications are that we are easing on the inflation side," he said. "From what I'm seeing and from what respondents are telling us, we're seeing that inflation has maybe peaked."

Prices in the June survey of service sector purchasing managers dipped to 80.1, down 2.0 points from May. The survey showed 66% of service firms reporting higher prices, down from 75% in April, while 2% registered lower prices.

"Prices could come down substantially if we see the price of oil to continue to come down," he said. "That really impacts the whole overland trucking piece, the distribution channel which is very important on both manufacturing and services."

Service-providers continue to contend with an array of supply issues, which are limiting capacity and keeping the heat turned up on prices. But those supply pressures eased in June, Nieves said, adding that even if prices continue to surprise to the upside, service firms may no longer have as much pricing power.

"Pricing power won't be there as well if the demand continues to go south based on inflation," he said. (See: MNI INTERVIEW: US Inflation Has Likely Peaked-Fed’s Andolfatto)

TECHNICAL RECESSION POSSIBLE

The ISM services survey weakened in June but came in higher than investors expected, with the headline composite declining to 55.3 in June from 55.9 in May. A reading below 50 would indicate a contraction.

Demand has slowed, with the new orders subindex fell 2 pp to 55.6, but the ISM chair said it is not a worry over the medium term. "There's been some pullback for sure and it relates to the inflation that we're experiencing, but people are still out. There still dining, they're still traveling," he said. "We're certainly seeing the spending on experiences."

And despite a 2.8 pp drop in the employment subindex to 47.4 in June, Nieves said labor demand remains strong. "Our respondents are telling us this is mostly due to just the restrictive labor pool and difficulty in backfilling open positions," he said. "There have been some layoffs but it is isolated."

Like the ISM manufacturing survey chair, Nieves sees the potential for a technical recession despite a baseline case for continued growth this year.

"We could technically be in a recession very soon, if not already, based on contraction on GDP," Nieves said. But, "Even if we do go into a recession, it would not be as severe or strong as what we've experienced in the past because all indications are that we're still going to stay on this growth pattern."