MNI INTERVIEW: US Services Cooling, Not Crashing-ISM Chief

MNI (WASHINGTON) - Growth in U.S. service activity is slowing despite an uptick in the ISM's measure of the sector last month, Institute for Supply Management chair Steve Miller told MNI Monday, though is no reason to believe the economy is on the brink of a sudden downturn.

"It's all consistent with a slower growth rate in services, which is which has been the trend," he said. 

Miller said the sector's underlying growth trend is settling at a lower rate, and the July report indicates "we're seeing flat, slow growth," he said. "The contractions of two of the last four months were not anomalies. They were more of a settling trend." 

The ISM services composite gauge increased 2.6 percentage points to 51.4 in July, above consensus expectations for 51.0, and the highest since May. Business activity, new orders, and employment all rebounded markedly in July, but the services sector has been in contraction territory for two of the last four months.

The ISM's recent readings are broadly consistent with 0.8% real GDP growth on an annualized basis, Miller said. 

"If you buy into the commentary that the stock moves that are happening lower now are because of lower expectations of growth, then our numbers are very consistent with that," he said, indicating that the Fed did not have the ISM services report last week during the FOMC meeting. 

"For the time period April through July, the services growth rate is the lowest it's been since the pandemic and then lowest it's been since 2009 before that," he said. 

SLOWER EXPANSION

The underlying composition of the July report was strong. The business activity index increased 4.9 percentage points to 54.5, while new orders were up 5.1 percentage points to 52.4, and the employment index jumped 5.0 percentage points to 51.1. An ISM reading above 50 indicates expansion.

The new export orders index increased by 6.8 percentage points to 58.5 and the prices paid measure increased by 0.7 percentage points to 57.0. 

Miller expects that job measure to remain in the low 50s in coming months. "Based on how business activity and new orders popped back," survey comments indicating rehiring of open positions and hiring to meeting projected growth for the fourth quarter, "it seemed to me that the employment number going back to very slow growth is consistent with that," he said. 

MANUFACTURING SPILLOVER

Miller also indicated it is inevitable for the prolonged decline in the manufacturing sector to spill over into services. (See: MNI INTERVIEW: US Manufacturing Faces Hard Landing Risk - ISM)

"With this extended contraction in manufacturing, I think it can't help but bleed over to services. The longer that that goes on, I think the more volatile and suppressed you'll see the services," he said. "That lends fuel to the idea we need to see rate cuts." 

"With real estate, rental and leasing seeing continued negativity three of the last four months of reporting and being over 10% of GDP, that would be a significant boost if we could see rate cuts sooner rather than later," Miller said.