MNI INTERVIEW: US Service Growth To Keep Fed Cuts Gradual-ISM

MNI (WASHINGTON) - U.S. service growth appears likely to hold up even if it remains soft, Institute for Supply Management chair Steve Miller told MNI Thursday, suggesting the Federal Reserve can begin lowering interest rates this month with a more moderate 25 basis point cut. 

Recent reports have shown "anemic growth" with "stability" in the vast U.S. service sector, and there is not anything at the moment suggesting a sudden fall off in growth, Miller said. 

The services index has been fairly consistent to the point that a 50 basis point cut by the Fed this month would be "shocking the system," Miller said. Still, if the services PMI dropped again near 48 then he thinks a larger cut should be considered. (See: MNI POLICY: Fed Prefers Gradual Rates Easing If Jobs Allow)

The ISM Services Purchasing Managers Index was little changed in August at 51.5 after 51.4 in July. It has averaged 51.5 so far in the third quarter, up from 50.7 in the second quarter but down from 52.5 in the first quarter. 

SLUGGISH 

The report indicates the economy has slowed but doesn’t seem to be contracting, Miller said. ISM's employment index softened to 50.2 from 51.1 in July. About as many employers added to payrolls as cut them in August. 

"It seems like everything is sluggish. It seems like the employment number just mirrors lower inflation, but kind of anemic growth," he said. New orders rose to 53.0 from 52.4 and were the highest since May, but Miller described the figure as "historically speaking, it is very much on the lower end."

Still, Miller doesn't expect demand to decline significantly. "I don't expect people to cut back. It doesn't seem like there's that kind of panic."

The prices paid index rose to 57.3 from 57.0 in July. It has averaged 58.0 so far this year, down slightly from 59.3 in 2023 and much lower than 2022’s average of 76.4. The price reading was the highest in the last three months. 

"But it doesn't seem to be a panic reading," Miller said. It is "very moderate" and "consistent really with the low inflation rates that we're seeing."

Even with lower interest rates coming, Miller said he expects growth to mostly move sideways. 

"I'm not seeing a lot of commentary around constriction due to high interest rates," he said.