MNI INTERVIEW: Services Seen Holding Up Under Higher Rates-ISM

U.S. services in May expanded at the fastest rate since last August and that positive momentum will likely continue next month, Institute for Supply Management services chair Anthony Nieves told MNI Wednesday, despite increased business concerns about high interest rates.

"Unless something falls off the rails, we're going to stay on this path of growth," said Nieves, calling the weak ISM services PMI in April a "one-off." He expressed confidence that the June report will come in again near 54%.

"All indications are we will continue to see this growth. It's not going to be huge growth. I don't anticipate us getting into that high 50 percentile, low 60 percentile range for quite some time until things stabilized," said Nieves.

The ISM services index jumped 4.4 percentage points to 53.8 in May, well above expectations of 51.0 and breaking a trend of three straight months of decline. The services sector has expanded for 46 of the last 48 months. Business activity surged 10.3 percentage points to an 18-month high of 61.2. New orders were up 1.9 percentage points to 54.1 and employment increased 1.2 percentage points to 47.1.

"It kind of went off the rails one month and it's back on track. We're seeing it still move steady forward, as far as this incremental growth," he said.

CONCERN OVER RATES

The report's comments were mixed, with a rising concern over the level of interest rates, Nieves said.

"There is a bit of cautiousness out there," he said. "I've not seen this many comments from the respondents regarding interest rates in a while. It just seems universal, and for inflation for sure."

Higher-than-expected inflation data at the beginning of the year pushed back expectations for the Fed's first rate cut. Markets are now pricing in close to two cuts near the end of the year starting in November, compared to the six projected at the start of 2024. Fed officials in March projections expected three rate cuts this year. (See: MNI INTERVIEW: Fed Might Not Cut Rates In 2024 - Andolfatto)

Nieves said a reduction in interest rates wouldn't lead to a surge in demand for business. "At this juncture, it would be more on the marginal side. I definitely believe it'll have a positive impact, but it's not going to open up the floodgates by any stretch."

Yet, despite higher interest rates, Nieves expects demand to hold up well, with the new orders index holding in the mid-50s for the next few months.

But the outlook will depend in part on how business manage their variable expenses, Nieves said, pointing to deliveries and employment. The employment index in May was in contraction territory for the fifth time in six months, suggesting businesses could be wary about the future.