MNI INTERVIEW: Surprising ISM Miss Doesn't Signal Concern Yet

A surprising contraction in U.S. services in December probably won't lead to a further decline next month, Institute for Supply Management chair Anthony Nieves told MNI Friday.

The ISM services survey weakened substantially in December, with its headline composite falling 6.9ppts from 56.5 in November to 49.6, one of the largest monthly declines on record. It was the first contraction since May 2020 and well below the Bloomberg consensus expectation at 55.0.

Nieves sees a rebound in January and February with the index settling in the low 50s, but even another decline won't derail the industry, he said in an interview.

"I don't expect it to be dropping down further from where we are right now," he said. "I don't believe we have all of the factors in here to be concerned, overly concerned."

TEMPORARY WEAKNESS

"Based on what we had coming out of the semi-annual [forecast] with out respondents, even if we did have contraction territory, it wouldn't be a long drawn out effect from it," he said. "There are too many other positive things happening right now in the economy that I believe the sector will continue to grow," he said.

Many parts of the ISM services report weakened in December. New orders plunged 10.8ppts to 45.2 and business activity fell 10ppts to 54.7. The employment index slid to 49.8 from 51.5, and prices fell 2.4ppts to 67.6. Nieves said the report does not reflect December's weather-related disruptions.

The big fall in the new orders sub-index is likely a temporary adjustment, as is some recent weakness in real estate rental and leasing, Nieves said. "Even if it stayed in contraction territory, I expect that to to increase a bit."

It's too early to say whether services have entered a stagflationary environment, he said. "I'm not going to change anything on one month. I think that if we start seeing this go both into January and February then I would say 'yes.'"