MNI INTERVIEW: US Service Growth Resilient, Prices Too - ISM

Activity in the U.S. service sector expanded sharply in January and is likely to sustain the current pace in coming months, that could help fuel ongoing price pressures that will make it hard for the Federal Reserve to cut interest rates, Institute for Supply Management chair Anthony Nieves told MNI Monday.

The ISM services composite gauge jumped 2.9 points to 53.4 in January, well above consensus expectations for 52, and the highest reading since September. The improvement was driven by an increase in employment and the new orders index, up 2.2 points to 55.0. The services sector expanded in January for the 13th consecutive month, and Nieves is optimistic about the path ahead.

Nieves said the report points to a modest but significant reacceleration in the economy. "This seems more sustainable, and there's some room for some incremental growth going forward," he said in an interview.

The decline in the ISM services index in December proved short-lived, with the January report showing the index bouncing above its six-month average, and also erasing concerns about the December employment subindex. The January employment subindex jumped 6.7 points to 50.5, and Nieves said he is expecting the measure to keeping rising over the next few months.

"I see employment getting up a little higher than where it is right now," he said. "I think that we'll start seeing some more hiring, if not next month, definitely the following month, and that deliveries will continue to slow and those two alone the help on the composite" PMI index.

PRICES JUMP

The ISM services prices gauge surged 7.3 points to 64.0 in January, the largest monthly increase since August 2012, with 15 industries reporting an increase in prices. Only one industry category -- Agriculture, Forestry, Fishing and Hunting -- reported a decrease in prices for January.

Commentary from ISM survey respondents suggests the shipping disruptions in the Red Sea could have contributed to the rise in the prices and supplier deliveries indices. Nieves pointed to increased price pressures holding up the Fed from committing to interest rate cuts. (See: MNI INTERVIEW: Fed Could Cut By May, Inflation Lingers - Kaplan)

"This is what's hindering the Fed from continuing on the path of multiple interest rate cuts," he said. "Our respondents are indicating that there is still cost pressure as well as inflation that they're combating."

"Hopefully, we see the pricing come down a bit," Nieves said. "I'd like to see it come back down into the 50s." The January reading is the 19th in a row near or below 70%, with nine straight months at or below 60% from April to December last year.

Demand growth is holding up well, buttressed by the anticipation for Fed rate cuts later in the year. "Respondents are telling us that they're ready to start doing some spending," said Nieves. "New projects are coming online, a new fiscal period, capital projects are coming, and certain funds are being released for companies to spend."