Services economy continues showing strength, says ISM

June services economy activity grew again, according to the new edition of the ISM Report on Business, which was issued this week by the Institute for Supply Management (ISM).

The Services PMI—at 53.9 (a reading of 50 or higher signals growth) increased 3.6%, growing at a faster rate for the sixth consecutive month. ISM said that the services sector has seen growth in 36 of the last 37 months, with December 2022 being the one month with a decline.

The June Services PMI is 0.1% above the 12-month average of 53.8, 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 15 of the 18 services sectors it tracks saw gains in June, including: accommodation & food services; arts, entertainment & recreation; real estate, rental & leasing; public administration; educational services; management of companies & support services; transportation & warehousing; wholesale trade; other services; utilities; professional, scientific & technical services; construction; finance & insurance; retail trade; and health care & social assistance. Services sectors with June declines, included: agriculture, forestry, fishing & hunting; mining; and information.

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

• Business activity/production, at 59.2, increased 7.7%, growing at a faster rate for the 37th consecutive month, with 15 sectors reporting growth;

• New orders, at 55.5, increased 2.6%, growing at a faster rate for the sixth consecutive month, with 13 sectors reporting growth;

• Employment, at 53.1, rose 3.9% and saw growth after contracting for three consecutive months, with nine sectors reporting growth;

• Backlog of orders, at 43.9, rose 3.0%, contracting at a slower rate for the fourth consecutive month and comes off of its lowest reading in May at 40.9 since a 40 reading in May 2009, with seven sectors reporting growth;

• Supplier deliveries, at 47.6, (a reading above 50 indicates slower deliveries) were off 0.1% from May, growing at a faster rate for the fifth consecutive month, with three sectors reporting slower deliveries following May’s 47.7, the slowest reading since June 2009’s 46 reading;

• Prices, at 54.1, fell 2.1%, increasing at a slower rate for the 73rd consecutive month, with 12 sectors reporting growth; and

• Inventories, at 55.9, down 2.4%, growing at a slower rate, for the second consecutive month, with nine sectors reporting growth

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

“Strong procedural volumes are driving above-budget revenue performance, but profitability continues to suffer due to higher expenses,” said a health care & social assistance panelist. “Inflationary pressures, staffing challenges, limited capacity and insufficient payer rates continue to financially challenge the health system. Supply chains continue to moderately improve.”

A retail trade panelist said that overall business conditions are good, but growth is at a slow pace.

Tony Nieves, chair of the ISM’s Services Business Survey Committee, said in an interview that the main takeaway in the report is that consumer spending on services-based categories is driving the positive momentum. Which, he said, was evident with 15 services sectors seeing overall growth, another 15 seeing business activity growth, and 13 sectors seeing growth for new orders and nine seeing employment gains.

“People are spending less on tangible goods and more on experiences,” he said. “That seems to be the trend we are seeing.”

As for how the first six months of 2023 went overall, for the services sector, Nieves explained that coming out of contraction in December to end 2022 there was an expectation that a slowdown was apparent, but each month over the first half of 2023 saw a reading of 50.3 or higher.

“June’s 53.9 exceeded expectations, or projections,” he said. “And now I think we will see the same incremental growth going forward. There is concern about the Fed looking to raise rates again this month, which has affected real estate and leasing, more so on the resale and new home starts and not as much on the rental leasing of things. There is still some growth there, but it is not across the board.”

As for the prospects of a recession, the report’s panelists indicated that was not a major concern for them, according to Nieves.

“We know what makes, or causes, a recession, and I think with growth and low unemployment, things should be fine,” he said. “The Fed is definitely attacking inflation with some gusto, maybe more than we would like, but unless something catastrophic happens we are going to see this growth continue…and we are not even in the historically strong months, which are typically over the course of the fourth quarter.”

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