September Services PMI remains on growth track, reports ISM

Economic activity in the services sector grew for the fourth straight month in September, according to the Services ISM Report on Business (formerly the Non-Manufacturing Report on Business), which was issued today by the Institute for Supply Management.

The report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—inched up 0.9%, to 57.8 (a reading of 50 or higher indicates growth is occurring), in September. This followed a 1.2% August decline and a 1% gain in July.

The September Services PMI is 4% above the 12-month average of 53.8, with the highest reading over that span being July’s 58.1 reading and the lowest being April’s 41.8. Services sector growth has seen gains in 126 of the last 128 months, with the exception of May and June of this year.

ISM reported that 16 of the 18 non-manufacturing sectors it tracks saw gains in September.

The report’s equally weighted sub indexes that directly factor into the NMI were mixed in September, including:

• business activity/production up 0.6%, to 63.0 growing, at a faster rate, for the fourth straight month, with 16 sectors reporting growth for the month;
• new orders were up 4.7%, to 61.5, growing at a slower rate, for the fourth straight month, with 14 services sectors growing;
• employment rose 3.9% to 51.8, snapping a six-month stretch of declines, with the report noting that speaks to companies calling back furloughed employees and hiring to meet increased demand; and
• supplier deliveries, at 54.9 (a reading of 50 or higher indicates contraction), slowing at a slower rate for the 16th consecutive month

Other notable metrics in the report included: a 3% gain in inventories, to 48.8, up for the second straight month; a 5.2% decrease in prices, to 59.0, increasing at a slower rate for the sixth consecutive month; and backlog of orders, at 50.1, down 6.5%, growing, at a slower rates, for the fourth consecutive month. 

Comments in the report submitted by ISM member respondents continued to reflect the ongoing challenges being presented by the COVID-19 pandemic, while business conditions are seeing some gains.

“Business has been fairly stable over the summer; however, there is still a great deal of uncertainty as we move into fall and winter [and] how our sales volume will be,” said an Agriculture, Forestry, Fishing & Hunting respondent.

And a Professional, Scientific & Technical services respondent said: “Customer confidence creeping back as a belief in the end, or perhaps taming, of COVID-19 increases; however, it comes with a high degree of caution regarding uncertainty in the marketplace and a reluctance to commit. Exploratory conversations are increasing, but hard orders are not.”

In an interview, Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said that while the services sector is not at pre-pandemic levels, growth is still occurring.

“As businesses start to reopen, there are many variables in play that could affect things down the road,” he said. “Weather is one, with many restaurants and food services providers utilizing outdoor dining. That will not be feasible, as we get into these cold weather months. The state of Florida has opened up and California has opened up salons and personal care services over the last couple of weeks. Things are definitely opening up, just not at pre-pandemic levels. We are definitely going to need another stimulus package…both parties are in agreement that they need to help the individual, as well as small business.”

As for the Services index, Nieves said employment had a nice uptick, with jobs being added, while remaining well below pre-pandemic levels.

“The key thing when looking at the key four [metrics] in the composite index, the one that was keeping it up—supplier deliveries—has come down and is still slowing,” he said. “Can you imagine if deliveries were to slow at previous levels? The composite would be even higher, but we are running into capacity issues and logistics issues. With business activity seeing increases, it is starting to clog up supply chains, even though it is not reflected in backlog of orders [down 6.5%, to 50.1, in September], it is still growing month-over-month. Things are heading in the right direction. We have to keep businesses afloat and make sure there are fewer business fatalities than what we have seen so far. The stimulus is going to be key, because I don’t think the economy can kick start itself on its own.”    

Looking ahead to the remainder of 2020, Nieves said he expects continued growth, for the services sector, with the caveat that it may not be as strong as what is currently happening, with weather potentially being a factor, if conditions wane.

“Businesses that are still operating are going to continue to grow,” he said. “It is just a matter of at which rate of growth. We will still see this path, so to speak, but maybe not the pace.”