MNI INTERVIEW: Service Prices Have Months Before Falling - ISM

U.S. service prices have months before falling to considerably lower levels while growth will continue to moderate through early next year, Institute for Supply Management services chair Anthony Nieves told MNI Thursday.

"You'll see more of a movement and a fluctuation and this might show up a few months down the road on the services side with prices coming down," he said. Nieves noted the divergence in prices paid measures in the manufacturing report at 46.6 earlier this week versus services at 70.7 and expects the fall in service prices to come in time.

"There's more of a lag time, cycle time as it relates to the impact as it pulls through the supply chain," he said, expressing surprise about October's 2ppt increase in the price index. "When you see prices go up on the manufacturing side, they won't go up as fast on the services side because sometimes it gets absorbed in the supply chain and it's not passed on directly or immediately."

The headline composite for the ISM services survey declined from 56.7 in September to 54.4 in October, disappointing expectations of 55.0. The survey has softened significantly since late last year and the October headline print was the lowest reported since the early stages of the pandemic in May 2020.

But even so, the recent ISM services data do not look as downbeat as seen in some other recent business surveys, such as the S&P Global US Services PMI that registered a sharper contraction.

HARDER SIGNALS

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, with some survey respondents showing greater concern about the economic outlook. The new orders index fell 4.1ppts to 56.5 in October and demand appears to be normalizing right now, he said.

Still, the services sector is holding up despite the Federal Reserve's historically fast tightening cycle this year, he said. Nieves pointed to the ISM manufacturing survey as a leading indicator but downplayed concerns that a contraction in manufacturing would signal the same for services.

"All indications are that we'll finish up the year still growing just not at as fast a pace as we have seen in the past, due to the pent up demand," he said. "We'll start seeing some leveling off after the first of the year but right now things are still positive but there is a lot of uncertainty surrounding some of the conditions out there."

The ISM services chair said the employment picture is now more mixed than earlier this year as some companies still struggle to retain headcount and others are refraining from additional hiring. The employment index fell 3.9ppts to 49.1, below 50 for the first time in 3 months.

"Some companies are saying right now that they are not going to hire and they are taking a wait and see approach to see what's going on with the economic picture," he said.