Services sector growth remained intact in December, says ISM

The Institute for Supply Management (ISM) reported today that economic growth in the services sector saw growth for the seventh consecutive month, in its Services ISM Report on Business (formerly the Non-Manufacturing Report on Business).

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 57.2 (a reading of 50 or higher indicates growth is occurring) was up 1.3% compared to November.

And the December Services PMI reading is 2.8% higher than the 12-month average of 54.3, with July’s 58.1 the highest reading and April’s 41.8 the lowest reading. Services sector growth has seen gains in 129 of the last 131 months, with the exception of May and June of last year.

ISM reported that 14 of the 18 non-manufacturing sectors it tracks saw gains in December, including: Management of Companies & Support Services; Wholesale Trade; Retail Trade; Health Care & Social Assistance; Transportation & Warehousing; Finance & Insurance; Utilities; Agriculture, Forestry, Fishing & Hunting; Information; Professional, Scientific & Technical Services; Mining; Public Administration; Construction; and Educational Services. The four industries reporting contraction in were: Arts, Entertainment & Recreation; Accommodation & Food Services; Other Services; and Real Estate, Rental & Leasing.

The report’s equally weighted subindexes that directly factor into the NMI largely showed growth in December, including:
-business activity/production up 1.4%, to 59.4, growing, at a faster rate, for the seventh straight month, with 11 sectors reporting growth;
- new orders were up 1.3%, to 58.5, growing at a faster rate, for the seventh straight month, with 10 services sectors growing;
-employment decreased 3.3%, to 48.2, snapping a three month stretch of gains;
-supplier deliveries, at 62.8 (a reading of 50 or higher indicates contraction), slowing at a faster rate for the 19th consecutive month

Comments in the report submitted by ISM member respondents again reflected concurrent themes of business concerns and ongoing concern over the ongoing COVID-19 pandemic, with positive case numbers heading up.

An accommodation & food services respondent said that he is starting to see demand weakening as states go back to shut down, adding that his company will look to see business resume in late first quarter, as vaccine distribution takes place. And a construction respondent said that lack of labor continues to be a significant drag on business, with work plentiful at the moment but considering rejecting some orders due to shrinking capacity.

An educational respondent said: “Continued local and state shutdowns negatively impacting a variety of operations. Notably, shipping delays are beginning to affect operations as [parcel companies] all struggle under the strain of holiday-shipping demand. Construction and services continue to also be challenged, as COVID-19 infections become more pervasive with workers calling out to quarantine, etc.” 

In an interview, Tony Nieves, chair of the ISM’s Services Business Survey Committee, said that with the majority of the report’s data showing solid output, the only downside was the employment index, which was somewhat expected, due to the shutdowns that occurred in December.

Addressing inventories, which rose 8.9%, to 58.2, in December, Nieves said that the report’s respondents indicated inventories were too low to begin with, which goes hand-in-hand with the report’s inventory sentiment. Another factor he highlighted was the slowing of supplier deliveries, which was related to not just holiday-related pressure and the strain on small parcel delivery, but also trucking issues related to supply and demand. December backlog of orders, which dropped 2%, to 48.7, correlates more to output than the actual transportation of goods from point A to point B, he explained.

When asked how services sector demand may shake out in the coming months, Nieves said that the sector is still not operating at pre-pandemic levels.

“The vaccine is starting to get distributed, and hopefully the number of cases starts to decline and not grow,” he said. “We might see business come back, coupled with the stimulus package, not as much on an individual level but more for PPP and helping small businesses.”

When asked to assess how things could play out for the services sector-based economy in 2021, Nieves noted that while the report’s respondent comments were mixed in December, they largely correlated the specific sectors respondents are in.

“Going forward, there is more upside based on things being put in place and it hopefully will lead to continued growth,” he said.

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