MNI INTERVIEW:US Services Expect Growth Amid Darker Clouds-ISM

The outlook for U.S. services growth remains strong despite risks from inflation and the rising path for interest rates set by the Federal Reserve, Institute for Supply Management services survey chair Anthony Nieves told MNI Tuesday, adding that concerns about a recession late this year are overdone.

"We're still in good shape and we'll still see continued growth going forward. It won't be the big spikes that we saw last year, but we're not going to look at contraction anytime soon. If we do see some fall off, it'll probably be toward the latter part of the year if that even happens," he said.

"When we look at the components of what would contribute to us getting into a recessionary period, the only one we're combating right now is the inflation side effects," he said. "We're still on the right path. All indications are that we're not going to get into that negative territory."

He said the risk of an economic contraction is greater for China and Europe. "If there is any recession on the horizon, it looks like they'll dip into it before we ever will," said Nieves, who meets with the Fed monthly to talk about business conditions. Asked about softening in China's economy, Nieves pointed to the imports index falling 6.7ppts to 45. "That's a big dip," he said, adding that it may be residual from the Chinese New Year.

The ISM services index increased 1.8ppts in March to 58.3, meeting market expectations, while new orders increased 4ppts to 60.1. The report showed a 5.5ppt increase in the employment sub-index to 54.0, which Nieves said showed labor supply is improving but still not adequate. "We don't have the labor pool right now to backfill all the positions that are open," he said.

INFLATION CONCERNS

Nieves also said supply chains are "definitely getting better," pointing to shorter shipping queues outside West Coast ports and products moving faster, but added that the ISM's inventory sentiment index moved cratered 15.1ppts to deeply contractionary at 40.2 in March despite inventory showing growth at 51.7. "It's not up to business requirements," he said.

While noting increased fuel and chemical prices have been a top concern for firms, Nieves said he is hoping for some prices to ease over the next few months. "While some economists believe that by the fourth quarter we might hit some recessionary period, I'm only looking at it from the perspective of the report and what our respondents are telling us, and right now business still looks good."

But, Nieves also echoed concerns held by ISM manufacturing chief about risks coming from the Fed. "They have to be careful. They don't want to negatively impact consumer confidence either and that's a balancing act for them," he said. "But I don't anticipate them to be very big hikes."

Multiple consecutive 50 basis point rate hikes would be detrimental to the services economy, he said, instead preferring smaller but consistent steps. "Real estate rental and leasing is the biggest contributor to GDP on the services side, and you certainly don't want to negatively impact that particular industry."