ISM reports Services economy heads up in August for third consecutive month in September

The services sector continued its strong performance in September, growing for the third consecutive month, according to the latest edition of the Services ISM Report on Business, released today by the Institute for Supply Management (ISM).

The September Services PMI, at 54.9 (a reading of 50 or higher signals growth), rose 3.4% from August, marking the third consecutive month of faster growth. The August Services PMI, at 51.5, was essentially flat, with a slight 0.1% increase over July’s reading of 51.4, which was up 2.6% from June’s 48.8. May’s PMI was 53.8, following a 49.4 reading in April, which marked the first contraction since December 2022 (when the PMI was 49). Prior to that, the last contraction was in May 2020, when the PMI dropped to 45.4.

The September Services PMI reading of 54.9 is the highest level in the past 12 months and is 3.1% above the 12-month average of 51.8. The lowest reading during that period was June’s 48.8.

ISM reported that 12 of the services sectors it tracks saw growth in September, including: Real Estate, Rental & Leasing; Management of Companies & Support Services; Accommodation & Food Services; Mining; Public Administration; Health Care & Social Assistance; Finance & Insurance; Construction; Transportation & Warehousing; Information; Educational Services; and Utilities. Sectors reporting contraction included: Other Services; Agriculture, Forestry, Fishing & Hunting; Wholesale Trade; Professional, Scientific & Technical Services; and Retail Trade.

The report’s equally weighted subindexes that factor into the NMI mostly saw gains from August to September, including:

• Business Activity/Production: At 59.9, up 6.6% from August, marking the third consecutive month of faster growth, following a contraction in June (49.6), which was the first monthly contraction since May 2020. Business Activity/Production has expanded in 51 of the last 52 months, with 12 sectors reporting growth;
• New Orders: At 59.4, up 6.4%, also growing at a faster rate for the third consecutive month. This followed a contraction in June for the second time since May 2020, with 11 sectors reporting growth;
• Employment: At 48.1, down 2.1%, contracting after two months of slower growth, with six sectors reporting gains;
• Backlog of Orders: At 48.3, up 4.6%, contracting at a slower rate for the second consecutive month, with five sectors reporting gains;
• Supplier Deliveries: At 52.1 (a reading above 50 indicates slower deliveries), up 2.5% from August, showing a slowdown after two months of faster growth. Five sectors reported slower deliveries;
• Prices: At 59.4, up 2.1%, marking the 88th consecutive month of price increases. This is the 23rd consecutive month prices have been below 70, with 17 of the last 18 months at or below 60. In contrast, prices were near or above 80 from September 2021 to June 2022, with 12 sectors reporting price increases; and
• Inventories: At 58.1, up 5.2%, growing at a slower rate for the second consecutive month, with 10 sectors reporting gains
• Comments from ISM member panelists included in the report highlighted various trends in the services sector.

“Overall, economic factors are somewhat stable this month,” said an Accommodation & Food Services panelist. “Volatility was limited, driven more by seasonal factors than geopolitical issues or election season. That stability may be short-lived due to looming port labor issues heading into October.”

A Retail Trade panelist reported that their company is starting to see positive annual sales gains, though described the pace as slow but steady.

In an interview, Steve Miller, Chair of the ISM Services Business Survey Committee, said the broadening of industries seeing expansion was a key driver of the strong Services PMI reading for September. He pointed to sectors like Construction and Real Estate, Rental & Leasing entering expansion territory, along with a reduction in sectors experiencing contraction.

“I think it’s kind of a double-hit, where sectors that were neutral or negative are now positive,” Miller said. “Inventories were up while sentiment was down, indicating that the reading is still above 50. This is a good sign, though it’s still closer to where we would like it to be, while inventories have increased for the fourth consecutive month, and are in expansion territory for the second month.”

Miller also noted that total services output for the third quarter was at its lowest level since 2009 in terms of average ratings.

“So, are we really at 51 or 55? That’s the question I have heading into October,” said Miller.

With Business Activity/Production and New Orders showing strong sequential gains—6.6% and 6.4%, respectively—Miller observed that there has only been one instance in the past five years of a 6% or higher month-over-month growth rate. That instance, however, was during the pandemic, whereas coming out of the pandemic lockdowns in June and July 2020, there were increases of 8% and 21% in New Orders, and 15% and 24% in Business Activity/Production.

He added that, going back to 2019, there are no examples of consecutive 6% sequential increases.

When asked about the potential impact of the East and Gulf Coast port strikes on services activity, Miller did not foresee a significant inflationary impact.

“There’s no additional money coming in, so I don’t see how it could be inflationary,” Miller said. “There will be some costs that rise, but that just means there’s less money for other activities. I expect it to be deflationary because people won’t be paid. Overtime will drop for manufacturing, and port workers will be out of work. Transportation services providers on the East and Gulf coasts who can’t shift operations to the West Coast will face financial hardship. If the strike continues for a while, it could significantly impact services, as people may hold off on large investments like homes or cars due to concerns about income.”

Looking ahead to the fourth quarter, Miller said he will be watching the Retail Trade sector closely. If the sector, which has contracted for four consecutive months, enters expansion territory in October with increased consumer spending, he sees it as a positive sign.

However, he noted that if the port strike continues for three or four weeks, it could drive the Services PMI below 50.

“If it gets resolved quickly, I’d look for signs of recovery in consumer activity, accommodations, and retail. If we see that turning positive, I’d be optimistic for the fourth quarter,” Miller said.

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