MNI INTERVIEW: US Services Growth Seen Rebounding Into Q4 -ISM

ISM services survey chair Anthony Nieves told MNI that firms report no evidence the U.S. is heading into a recession and he expects growth in his industry to pick up through year-end even as the latest reading points to slowing momentum.

The ISM Services index fell 1.2ppts to 52.7 in July, slightly below the Bloomberg consensus of 53. Measures related to business activity, new orders, and employment all pulled back, reversing part of their June gains.

"It's just a slight pullback on the demand side as far as it's reflected in slightly lower business activity, but it's all still in a rate of growth," Nieves said Thursday about a dip in the new orders measure of 0.5ppt to 55.0. "It's no pullback to where we're going to see contraction anytime soon."

"I expect this to rebound a little bit as well and get more into the mid 50s on the composite [PMI] as we get into the tail end of of the third quarter and going into the fourth quarter," said Nieves, basing his optimism on seasonal factors. The ISM manufacturing survey chair this week shared a similar view about growth later this year.

ALIGNED FOR GROWTH

The prices index has been trending lower since early 2022 but it did move up 2.7ppts in July to 56.8. Still, the ISM chief said "inflation is getting tamed."

The July reading is the 13th in a row near or below 70, with five straight months below 60, and following 10 straight months of readings near or above 80.

"We're starting to see the sector get more aligned with historical trends," he emphasized. Nieves expected that to mean the employment index could sag a bit more, potentially briefly below 50. In July that index fell 2.4ppts to 50.7, the lowest since May at 49.2. "Mostly, companies are still looking to backfill open positions."

Growth has proven surprisingly durable despite the Federal Reserve's 525 basis points of hiking over the last 17 months, Nieves said. (See: MNI INTERVIEW: US Disinflation In Train But Economy Overheated)

"We don't have any of the variables in play for recession and our respondents are reflecting that by not commenting and saying that there's potential for recession," Nieves said. "We still have low unemployment, we're still growing, we're looking at a 1% annualized growth rate with this composite index."