MNI INTERVIEW: Service Slowdown Does Not Signal Recession-ISM

U.S. services growth slowed in March and prices paid remained elevated but the economy should be able to skirt recession, particularly if the Federal Reserve changes its mind and starts cutting interest rates later this year, Institute for Supply Management services chair Anthony Nieves told MNI Wednesday.

The ISM services survey’s headline fell from 55.1 in February to 51.2 in March, below expectations and one of the lowest readings for the ISM’s headline composite going back to the Great Recession. The report again raises questions as to whether the economy is on the cusp of a recession since the 50 mark separates growth from contraction.

"I'm not overly concerned," Nieves said in an interview. "I'm expecting us to stay north of 50 moving forward with this incremental growth."

The Fed's tightening is not responsible for the ISM's price index falling 6.1 percentage points to 59.5 in March but higher interest rates are having more of an impact that in recent months, while inflation is still not on a path to reach the Fed's 2% target, he said. "I think we're just a little bit too high right now."

FED REVERSAL?

The ISM service sector measure of new orders plummeted in March, down 10.4 percentage points to 52.2, while employment edged down 2.7 percentage points to 51.3. Business production eased 0.9 points to 55.4.

Supply chain obstructions cleared as the supplier deliveries index showed an improvement in vendor performance, he said. "As we start hitting the warmer months then we'll start seeing some more increased activity and you're starting to see it in some of the intangibles," he added.

But despite some slippage in growth and demand, Nieves pointed to prices in noting that the Federal Reserve is still likely to raise rates, even as he's hoping for a Fed pause. "Hopefully, they'll just stop with the increases soon," he said.

(See: MNI INTERVIEW: Fed Not Done Hiking Despite Bank Pain-Cecchetti)

"I'm hoping that things change and that we see in the second half of this year some cuts," he said, acknowledging that Fed officials are not signaling cuts and that still-low unemployment gives the Fed room for additional rate increases.

Nieves noted that some survey respondents commented on recent banking turmoil and the collapse of SVB. "The comments did indicate that they were concerned but it wasn't impacting them at this point in time."