MNI INTERVIEW: Services Growth Muddies Fed Inflation Fight-ISM

The U.S. services sector's stronger-than-expected growth could mean the Federal Reserve's fight against inflation could be harder than previously expected as demand continues to hold up, Institute for Supply Management services chair Anthony Nieves told MNI Monday.

The prices subindex showed minimal easing down 0.7ppt to 70.0 but the report hinted at a pickup in domestic demand and continued cost-push pressures on service sector prices.

"It's still very strong pricing and I would prefer to see it more in the high 50s low 60s, but that's not going to happen anytime soon," Nieves said in an interview. "Prices will come down as soon as demand wanes a little bit, but still even with the uncertainty and and the fear of a recessionary period, consumer demand was still fairly strong."

"Right now, as capacity is getting better, it's still not alleviating the pricing," he said, noting supply side indicators point to steady unraveling of bottlenecks. "Not to say that this is applicable to all commodity line items, but there's still pricing that's based on what the market will bear, not necessarily just because of the demand exceeding the supply."

The headline composite for the ISM services survey increased 2.1 points to 56.5 in November, beating expectations of 53.3. November's strengthening was more than explained by the current business activity component, which jumped 9.0pts to 64.7, its highest reading since late 2021.

The November reading for the ISM Non-Manufacturing index marks the fourth reading between 56.5 and 57.0 out of the last five months. But, once again, the ISM services data diverged from the S&P Global US Services PMI that registered a sharper contraction.

Fed Chair Powell last week flagged inflation in "core services" outside of housing as a key concern for policymakers.

FED RISKS, RECESSION FEARS

Nieves expects the services sector to see moderate growth through the end of the year but added there may be some softening in the index early in the new year after the holiday season.

"We see that the first month of a new year as always there's a slight pull back from the holiday season and then you get a better indication at the end of January, February as to how things will look for the balance of that quarter," he said.

Still, the services sector is holding up despite the Federal Reserve's historically fast tightening cycle this year amid a still-strong labor market with 3.7% unemployment and elevated wage growth, he said, citing the Fed as the top risk facing services. (See: MNI INTERVIEW: US Wage Pressures Likely To Be Longer Lasting)

"Overall, the feeling is that things are moving in the right direction," he said. "There's just a bit of concern as to what's in store down the road and the sense of fear of a recession."

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. "Even if we do hit a recessionary period, it's not going to be a deep tranche that we're going to see it contracted out for a long period of time."