MNI INTERVIEW: US Services Firm Despite ISM Miss, Prices High

U.S. service sector activity expanded for a 14th month in February, albeit at a slower pace and accompanied with price pressures that moderated but remain too hot for the Federal Reserve, Institute for Supply Management chair Anthony Nieves told MNI Tuesday.

Nieves remains optimistic about continued moderate growth ahead, citing the new orders index that increased 1.1 points in February, but acknowledged that activity has been volatile in recent months.

"With a new orders index of 56.1, that tells me that there's stuff in the pipeline over the next month or two that's going to keep this buoyed," he said in an interview, also noting inventories should not remain a drag for much longer. "I expect the inventories not to dwell in the contraction territory more than another month or two at that."

The ISM services composite gauge eased 0.8 points to 52.6 in February, below consensus expectations for 52.9. The miss was driven by faster supplier deliveries and a contraction in the employment index, down 2.5 points to 48.0.

"This is a good report and sustainable. The majority of comments from respondents are positive," Nieves said.

PRICES TOO HIGH

The survey's underlying components were mixed, as the business activity measure increased 1.4 points to 57.2. Among the 13 industries reporting growth in business activity were retail, agriculture, finance, and wholesale trade. There were four industries reporting a decline in business activity in February, including arts/entertainment, other services, mining, and transportation/warehousing.

The drop in the prices-paid index in February by 5.4 points to 58.6, reversed the surge seen in January, but remains above levels seen in November and December. Nieves said the reversal is encouraging but does not alter his view that prices are too high for the Federal Reserve.

"We still have inflation and they still need to combat it," he said, acknowledging that the Fed's communications adjustment months ago buoyed expectations for interest rate cuts. The easing in financial conditions "helped the psyche for the business community as well as the consumer," Nieves said. (See MNI: Fed Messaging Swings Boost Policy Volatility-Ex-Officials)

EMPLOYMENT COSTS

The employment index remains volatile, dropping to 48 in February from 50.5 in January. Over the past several months, the employment index has seesawed around its neutral threshold of 50. This is the second sub-50 print in the past three months with the six-month moving average also now below the 50 line, a possible hint of trouble for a strong labor market ahead of Friday's payrolls data.

Comments from ISM survey respondents say the employment picture is a mixed bag, Nieves said, with concerns around controlling variable expenses. "It's a struggle and there is still some wage pressure out there."