MNI INTERVIEW: US Services Growth Has Room To Pick Up - ISM

Institute for Supply Management chair Anthony Nieves told MNI Wednesday the ISM services index is likely to edge higher in coming months after climbing to a six-month high in August, a further sign that activity growth is holding up in the third quarter.

"I anticipate them being around the same if not slightly higher," he said in an interview. "Overall, we'll have a little bit more build up going into the holiday season as long as things stay on track."

The ISM services index increased 1.8pp to 54.5 in August, better than expectations of 52.4 and the highest since February. ISM services has held above 50 for eight months, which is the dividing line between expansion and contraction.

Despite the increase, Nieves said the survey indicates the economy is consistent with below-trend GDP growth of around 1.6% and the Fed should not take it as a sign of an economy that is too hot. "I don't want to say we should get overly excited about that," he said. "It's within the realm of what we should be seeing."

"Hopefully the Fed doesn't interpret this that the economy is just going too strong and that they want to increase rates again." (See: MNI INTERVIEW: Hawkish Fed Pause In Sept - Ex-Staffer Trezzi)

NO SIGN OF RECESSION

The prices subindex increased 2.1pps to 58.9, the 75th consecutive month showing growth. Nieves said the monthly increase was driven mostly by fuel prices.

While the ISM chief downplayed concerns about a pickup in underlying prices pressures, he singled out food prices. "We do have to keep an eye specifically on food products though, because they seem to be the most volatile right now even more so than what we're seeing in fuel."

Many details within the survey firmed between July and August, with a 4.0pp jump in the employment index. Firms are still having difficulty backfilling positions, but they are starting to see more applicants and improvements in making matches. "Overall, the majority are seeing that there's more entering the workforce," Nieves said.

Business activity increased 0.2pp to 57.3 and new orders increased 2.5pp to 57.5. Nieves said survey respondents are seeing no sign of a recession.

But he said the increase in new orders and the better report does not suggest stronger underlying demand.

"We are about a month ahead. I thought August would continue to just be a little bit slow. More being spent on experiences versus the consumer goods but I think we're just ahead of where I expected to be by one month here, which is good," Nieves said. The August ISM report "did beat my expectations."