MNI INTERVIEW(RPT):US Services Resilient To Ukraine Impact-ISM

(Repeats article first published on March 4)

The U.S. service sector will likely remain shielded from any major effects from the war in Ukraine and the accompanying surge in commodities prices despite a softening of growth in February, ISM services survey chair Anthony Nieves told MNI Thursday, adding supply constraints from the pandemic continue to ease and have likely peaked.

"It's a risk that can be mitigated in the sense that things have to come through mostly on the manufacturing side before it trickles down and impacts the services sector," he said about Ukraine and increased commodities prices. "There's a bit of absorption that happens when things move through the supply chain like that and we'll have to see what happens in the next few weeks."

Despite the price index increasing in February 0.8ppts to 83.1 and the Ukraine crisis, the ISM services chief did not seem open to shifting his outlook for services prices, still seeing them fall later this year. "There'll be some workarounds, although I think it's going to affect certain businesses more than others," he said.

February's ISM index of services activity fell unexpectedly for the third consecutive time, despite the fading of omicron, dropping to 56.5 from 59.9, compared to the consensus expectation of 61.1. Nieves said the drop was the result of both supply and demand, but he still expected March to be "a little bit better, if not some sideways move. I don't see it going down."

PEAK SUPPLY CONSTRAINTS

Nieves also expressed optimism about supply chains, despite February's 6.8ppts surge in order backlogs to 64.2, an uptick in supplier deliveries indicating delivery times were longer, and a fall in new orders to 56.1 from 61.7. "Even though the rate of growth has slowed for new orders, it's still increased month-over-month from where we were," he said.

"The supply chain disruptions have eased a little bit," he said. "The capacity constraint is there because they're not meeting the demand. That doesn't mean that their output is less month-over-month. It's actually better, but the demand is exceeding the supply on that side. That's why they're still capacity constrained. It's slowing things down."

The ISM services chair said the economy is likely beyond the peak of supply chain constraints, a view that aligns with that of New York Fed researchers who earlier Thursday showed global supply chain pressures decreasing. Still, those researchers before today's update have told MNI that supply chain moderations were "relatively minor," with staggered data that could be revised over time, and warned Thursday "the possibility that the current heightened geopolitical tensions might lead to more elevated supply chain pressures in the near future."

Companies are still struggling to hire workers, with ISM's employment index falling 3.8ppts to 48.5 into contractionary territory. "I think it will grow. It's just going to be a struggle, an ongoing struggle, as the labor pool cannot meet the job availability right now," said Nieves, when asked whether job growth will be at a rate to help the services sector be able to match demand in the short or medium term.