Services economy output grows in October while sequentially declining, ISM notes

Services economy output showed growth in October while sequentially declining, according to the new edition of Services ISM Report on Business, released today by the Institute for Supply Management (ISM).

The services PMI — at 54.4 (a reading of 50 or higher signals growth) — fell 2.3% from September and grew at a slower pace for the 29th straight month, with services sector growth slowing in 151 of the last 153 Months intact was October. Additionally, the October services PMI hit its lowest level since May 2020 at 45.2.

The services PMI for September is 2.5% below the 12-month moving average of 59.2, with the 68.4 in November 2021 and the 55.3 in June 2021 marking the respective highs and lows for the period.

ISM reported that 16 of the service sectors it tracks saw growth in October, including: mining; agriculture and forestry, fishing and hunting; arts, entertainment and recreation; Transport and Storage; accommodation and catering services; Construction; utilities; Other services; Information; Retail trade; professional, scientific and technical services; educational services; Finance & Insurance; Public administration; health care and social assistance; and wholesale. The two industries with declines were Management of Companies & Support Services and Real Estate, Rental & Leasing.

The report’s equally weighted sub-indices, which feed directly into the NMI, were mixed from September to October, including:
-Business/Manufacturing at 55.7, down 3.4%, growing at a slower rate for 29th straight month with 15 service sectors reporting growth amid citing falling orders and reluctance to build inventories;
-New orders fell 4.1% to 56.5 and also grew slower for the 29th straight month, with 13 service sectors reporting growth;
-Employments down 3.9% at 49.1, falling after two months of growth with 11 service sectors reporting growth;
-Order backlog down 0.3% at 52.2, growing slower for 22nd straight month;
– supplier shipments at 56.2 (a reading above 50 indicates slower shipments), up 2.3% compared to October, a faster slowdown for the 41st straight month with nine service sectors reporting slower shipments; and
-Prices rose 2.0% to 70.7, rising faster for the 65th straight month with 17 service sectors reporting growth

Comments from ISM members included in the report highlighted various problems seen in the service sector.

“Business is lukewarm. We have general concerns that sales volumes are tending to decline as buyers say they plan to only buy what they need for immediate sale,” said a respondent from the agriculture, forestry, fishing and hunting sectors.

And one retail respondent said his company is making final preparations for a successful holiday despite lower sales, noting that there is a more available workforce this year and delays in the supply chain appear to have been made up for the time being.

Tony Nieves, chairman of the ISM survey committee for service companies, said in an interview that despite the sequential decline in the services PMI and the lowest reading in more than two years, while there are some indicators pointing to a decline, that means not necessarily that a serious recession is imminent.

“As economic uncertainty unfolds here, there are too many strengths in the economy [things] plunge into a deep recession,” he said. “We don’t have high unemployment, we have low unemployment and we still have month-on-month growth. And the only thing we are seriously fighting right now is inflation and the high prices that come with it.”

Addressing the report’s numbers collectively, Nieves noted that if they had been viewed pre-pandemic, they would have been very well received, with month-to-month growth intact.

As inventories dwindled in October, Nieves attributed part of that to things like increased sales, burn rate and products not replenishing as fast as they are consumed, based on feedback from ISM members surveyed. Another factor he identified was that shipments are slowing, shortages easing coupled with some lingering headwinds as shipments are down from levels four to six months ago.

“The supply chain has eased somewhat in terms of congestion and there are some challenges, just not as bad as in the first half of the year,” he said. “We’re seeing this across the board, and we’re starting to see things normalizing. While we see these numbers generally declining, they are mostly in the mid-1950s range. It’s starting to normalize and not getting any deep cuts here.”

Looking at the services economy on an annual basis, Nieves said the sector’s activity and performance are in line with its most recent semi-annual report.

“In the report, our respondents felt things would be easy going into 2022 and potentially see a small setback without a recession looming,” he said. “At the beginning of 2023 there was some uncertainty about a possible recession, with economists saying not so much in the first half of the year but possibly in the second half. Given that we have low unemployment, I think that’s the most important thing at the moment. The Fed tries to stave off inflation by raising interest rates, which affects its largest contributor to GDP, the home rental and leasing market. I think once we find that peak or dip in inflation and cut interest rates that will actually boost the economy. We’re hoping that happens sometime in the first half of next year so we don’t plunge into a recessionary streak in the second half.”

About the author

Jeff Berman, Group News Editor Jeff Berman is Group News Editor for logistics management, Modern conveyor technologyand Supply chain management review. Jeff works and lives in Cape Elizabeth, Maine, covering all aspects of supply chain, logistics, freight transportation and material handling on a daily basis. Contact Jeff Berman

Leave a Comment