Services economy continues on a growth path in April, reports ISM

Services economy activity remained on the right side of growth in April, 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 51.9 (a reading of 50 or higher signals growth)—increased 0.7% over March’s 51.2, growing, at a faster rate, for the fourth consecutive month. ISM said that the services sector has seen growth in 34 of the last 35 months, with December 2022 being the one month with a decline.

The April Services PMI is 2.6% below the 12-month average of 54.5, with October 2022’s 54.5 and December 2022’s 49.2 marking the respective high and low readings for that period.

ISM reported that 14 of the services sectors it tracks saw gains in April, including: Arts, Entertainment & Recreation; Other Services; Real Estate, Rental & Leasing; Accommodation & Food Services; Utilities; Public Administration; Transportation & Warehousing; Professional, Scientific & Technical Services; Educational Services; Health Care & Social Assistance; Retail Trade; Construction; Finance & Insurance; and Information. The three sectors reporting declines were: Mining; Agriculture, Forestry, Fishing & Hunting; and Wholesale Trade.

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

-Business activity/production, at 52.0, fell 3.4%, growing, at a slower rate, for the 35th consecutive month with 14 sectors reporting growth;
-New orders, at 56.1, rose 3.9%, growing, at a faster rate, for the fourth straight month, with 16 sectors reporting growth;
-Employment, at 50.8, decreased 0.5%, growing, at a slower rate, for the third consecutive month, with eight sectors reporting growth;
-Backlog of orders, at 49.7, fell 1.2%, contracting, at a slower rate, for the second straight month, after 26 consecutive months of growth, with five sectors reporting growth;
-Supplier deliveries, at 48.6 (a reading above 50 indicates slower deliveries), were up 2.8%, moving faster, at a slower rate, for the third straight month, with one sector reporting slower deliveries;
-Prices, at 59.6, falling 6.1%, increasing, at a faster, for the 71st consecutive month, with 15 sectors reporting growth; and
-Inventories, at 47.2, contracting after growing, at a faster rate, for the second consecutive month in March, with four sectors reporting growth

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

“Lead times are improving. Suppliers are struggling with how to position themselves with pricing; those keeping prices higher despite a drop in input costs are at risk of losing their business to those that are willing to adjust prices in line with lower input costs,” said an Accommodation & Food Services panelist.

A Retail Trade panelist said that the retail environment is lower year over year, but trends are stable year to date, adding that inventory levels are coming more in line to match the new lower demand trends. And a wholesale trade panelist observed that while the retail environment is lower year-over-year, trends are stable year-to-date, with inventory levels coming more in line to match the new lower demand trends.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that April’s numbers were solid and would have come in at a higher level had there not been a decline in the Business Activity/Production reading.

“The 3.9% gain in New Orders kind of offsets the 3.4% decline in Business Activity/Production,” he said. “The 48.6 reading for Supplier Deliveries indicates that we are seeing improved supply chain and logistics [output] across the board. Deliveries are faster, and some of it is due to things like improved capacity and efficiency, and slightly less demand. You put all of that together, and it provides a picture of where things stand today. The decline in inventories also factors into it, too, as lower inventory levels improve deliveries, as less inventory is carried on hand, making it a less of a lead time and a faster cycle time for orders. Companies trying to right size data inventories are getting better levels because they overstocked based on the long lead times previously.”

Addressing prices, Nieves said that they continue to moderate, with signs of price stabilization becoming evident, as the number of services-related commodities followed in the report are down by about 50%, with improved capacity a key driver for the price stabilization.

On a year-to-date basis, Nieves said the services sector remains on the same track outlined in the ISM’s December 2022 Semiannual report. And looking at the gradual shift, in consumer sentiment, from goods spending to services spending, going back to the onset of the pandemic.

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