MNI INTERVIEW: US Service Price Gains Aren't Transitory-ISM

U.S. service costs jumped again to a record high in October and will remain elevated until well into next year, pressures that Fed policy makers are underestimating, ISM survey chair Anthony Nieves told MNI Wednesday.

"I don't want to contradict the Fed but I think that this is definitely longer than what they even anticipated," Nieves said in an interview.

Prices in the monthly services survey rose 5.4 points to a 16-year high of 82.9 in October in the ISM survey. The gains may not level off until at least the second quarter of 2022, and there's almost no precedent in the last decade for any decline in overall price trends, he said.

"We're still seeing those pricing increases as demand has outpaced the supply and that's going to continue on until we see the supply chain disruptions ease, and inventories get built up on both the manufacturing and on the services side, more so on the manufacturing side," Nieves said.

PASSING ON HIGHER COST

The survey showed 66% of service firms reporting higher prices, up from 60% in September, and 1.2% registering lower prices.

"Companies are just trying to pass off or not absorb as much of the increase in raw material costs upstream in the manufacturing side but also there are some areas where they are using it as pricing power to to increase some of their margins," he said.

October's ISM services report continued to show demand outpacing supply, with record high backlogs, long lead times, and slower deliveries. The headline index jumped 4.8 points to 66.7, beating expectations, and the highest since the inception of the index in 2008. The new order level in October surged 6.2 points to a record 69.7.

New orders have been bid up as longer lead times push consumers to a buying frenzy, Nieves said. "They are definitely pushing forward some more orders in increasing quantity to try in this cycle to try and offset that backlog."

STRUGGLE TO FIND WORKERS

Companies are still struggling to hire workers, with the employment index down 1.4 points from the prior month to 51.6. Nieves said the employment sub-index tends to lag behind new orders levels, but to keep up with demand it should be in the upper 50s.

Increased wages and improved benefits have only helped "a little bit" in attracting workers and Nieves suggested the problem finding employees is not wages but increased worker leverage and their desire for flexibility.

"Some are not going to come in because they have options," he said. "We're seeing it with the unions and workers getting more leverage now and so that's that's putting a hinderance on the expansion."

Those trends suggest the next payrolls report on Friday won't show a major gain, he said, pointing to a good correlation between the ISM employment index and the government figures. Hiring growth has slowed by more than half in recent months from gains of about 1 million in June and July amid a major re-opening from the pandemic.