MNI INTERVIEW: Services Peaking As Fed Hikes Gain Traction-ISM

U.S. services growth showed signs of reaching a ceiling in April but price inflation remains hot and the Federal Reserve is unlikely to cut interest rates this year, Institute for Supply Management services chair Anthony Nieves told MNI Wednesday.

"We'll continue to see the PMI in the low to mid 50s range. I don't anticipate going up and having a spike anytime soon even with the growth of new orders," he said. That would be a slower path of growth than seen last year and in January and February, before a dip in March.

The ISM services survey’s headline edged up 0.7ppts to 51.9 in April, a tenth of a percentage point under the Bloomberg consensus. "As things are starting to stabilize, demand has waned a bit. We saw that when we contracted back in December and what we're seeing now is just steady incremental growth month over month," Nieves said. "Consumers aren't spending as much."

The ISM services chief acknowledged looming recession risks but expects demand and new orders to edge up "as we're getting into the warmer months," Nieves said. "Overall, the economy still looks pretty good."

"Based on what we've seen on the new orders index, we might have another uptick again on that composite" in next month's report, he said. "Employment will continue to stay above 50." Readings above 50 indicate expansion.

NO FED CUTS

The April ISM service sector measure of production sagged 3.4ppts to 52.0 as new orders increased 3.9ppts to 56.1. The employment index fell half a percentage point to 50.8. Underlying dynamics improved as 16 of 18 industries reported stronger new orders, compared to 12 in March.

Fed officials are signaling one more rate rise today to a range of 5% to 5.25%, the highest since 2007. (See: MNI INTERVIEW: Fed To Resume Hikes Later If Inflation Lingers)

"I don't anticipate the Fed will cut back rates anytime soon. If anything, they are just going to slow the increases," he said. The market is pricing in rate cuts starting in September.

Nieves is increasingly optimistic the Fed can get on a path to meet its 2% inflation target and so far recent banking turmoil is not impacting services, though there has been a change in sentiment around credit, particularly in the tech area.

The ISM measure of prices edged up to 59.6, with 30% reporting higher prices compared with almost 40% in January, the report showed.

"The number is not going to go substantially lower," Nieves said of prices. "We've been experiencing price increases on an ongoing basis but the Fed rate is definitely affecting psyches as well as specifically the residential real estate market."