May services economy activity remains on growth track, reports ISM

June services economy activity saw growth, according to the new edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The Services PMI—at 50.3 (a reading of 50 or higher signals growth)—fell 1.6% off of May’s 51.9 reading, growing, at a slower rate, for the fifth consecutive month. ISM said that the services sector has seen growth in 35 of the last 36 months, with December 2022 being the one month with a decline.

The April Services PMI is 3.6% below the 12-month average of 53.9, with July 2022’s 56.4 and December 2022’s 49.2 marking the respective high and low readings for that period.

ISM reported that 11 of the services sectors it tracks saw gains in May, including: Accommodation & Food Services; Management of Companies & Support Services; Professional, Scientific & Technical Services; Utilities; Retail Trade; Arts, Entertainment & Recreation; Construction; Other Services; Transportation & Warehousing; Public Administration; and Educational Services. Services sectors with May declines included: Mining; Agriculture, Forestry, Fishing & Hunting; Real Estate, Rental & Leasing; Wholesale Trade; Information; Health Care & Social Assistance; and Finance & Insurance.

The report’s equally weighted subindexes that directly factor into the NMI were mixed, from April to May, including:

-Business Activity/Production, at 51.5, fell 0.5%, growing, at a slower rate, for the 36th consecutive month, with 13 sectors reporting growth;
-New Orders, at 52.9, decreased 52.9, growing, at a slower rate, for the fifth consecutive month, with 11 sectors reporting growth;
-Employment, at 49.2, decreased 1.6%, contracting after three months of growth, with nine sectors up for the month;
-Backlog of Orders, at 40.9, down 8.8%, contracting, at a faster rate, for the third consecutive month, which was preceded by 26 months of growth, marking its lowest reading since coming in at 40 in May 2009, with five sectors reporting growth;
-Supplier Deliveries, at 47.7 (a reading above 50 indicates slower deliveries), were off 0.9% from April, growing faster, at a faster rate, for the fourth consecutive month, with four sectors reporting slower deliveries (this marked the fastest reading since June 2009’s 46 reading);
-Prices, at 56.2, decreasing 3.4%, increasing, at a slower rate, for the 72nd consecutive month, with 12 sectors reporting growth; and
-Inventories, at 58.3, increasing 11.1%, growing after contracting in April

Comments from ISM member panelists included in the report highlighted various issues being seen in the services sector.

A Wholesale Trade panelist noted that supply is plentiful, with freight moving quickly and costs coming down, calling it “a 180-degree change from a year ago. Also, sales demand is down.”

And a Public Administration panelist said that lead times are starting to shorten, due in part to transportation availability, adding that prices generally are continuing to increase but at a slower pace, coupled with the supply chain becoming much more reliable.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that while the Services PMI again saw growth in May, what is impacting the reading is the contraction in Employment, at 49.2, and Supplier Deliveries, at 47.7.

“Those readings have pulled the Services PMI down, because it is equally weighted for the report’s subindexes,” he said. “For employment, we are measuring change across 18 industries. There were nine industries with growth, seven with an increase, and two that were unchanged. That is why it is not quite the same thing…in contrasting it with May unemployment rising to 3.7% in May. For deliveries, they are faster, because not only has demand waned a little bit, but we also had such improvements on logistics and capacity. Overall, this report is still showing incremental, or sustainable, growth.”

Looking at May’s 11.1% increase in inventories, Nieves said that increase comes with the caveat that there is a cycle time factored into the reading. And he added that in previous months ISM panelists had indicated that they had increased order frequency and quantities over a period of time, trying to maintain continuity of supply, something which eventually caught up with them.

“We went from a contraction period to a glut,” he said. “There are certain items that are in short supply. Lots of companies still have goods sitting in warehouses that they cannot move. The demand is not there anymore. Companies are trying to right-size their inventories, and they are not there yet.

As for the prospects of a recession, Nieves explained that while concern over economic uncertainty remains, overall, ISM’s Services respondents maintain that their businesses are stable.

Using the report’s readings as a gauge for this sentiment, he said that with New Orders not contracting, remaining in the low 50s, that will translate into incremental growth going forward.

“We typically see a slowdown in the summer…you see it more on the manufacturing side and less on the services side, as people are out spending more money on services rather than tangible goods,” he said. “I don’t think we are there yet, for services. I am a little bit more concerned about manufacturing, which is the bellwether heading into a recessionary period. With the economy right now, there is just too much activity going on out there. And even if we did enter into a recessionary period, it would not be a very deep or long trough.”

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