Services economy activity finishes 2023 with growth, reports ISM

December services economy remained on a growth path to end 2023, according to the new edition of the ISM Report on Business, which was issued late last week by the Institute for Supply Management (ISM).

The Services PMI, at 50.6 (a reading of 50 or higher signals growth), fell 2.1% compare to November’s 52.7 reading, growing, at a slower rate, for the 12^th consecutive month. ISM observed that the services sector and the overall economy have each been growing, at a slower rate, for the 12^th consecutive month, through December. And it added that ISM the services sector has seen growth in 42 of the last 43 months, with December 2022 being the one month with a decline. 

January 2023’s 55.2 Services PMI marks its highest reading over the last 12 months, and May 2023’s marks the lowest reading for the same period, with the 12-month average through December coming in at 52.8.

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

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

• Business Activity/Production, at 56.6, increased 1.5%, growing, at a faster rate, for the 43rd consecutive month, with 12 sectors reporting growth;
• New Orders, at 52.8, fell 2.7%, growing, at a slower rate, for the 12th consecutive month, with nine sectors reporting growth;
• Employment, at 43.3, decreased 7.4%, contracting after six months of growth, with seven sectors reporting growth;
• Backlog of Orders, at 49.1, rose 0.3%, contracting, at a slower rate, for the second consecutive month, with six sectors reporting an increase in order backlogs in December;
• Supplier Deliveries, at 49.5, (a reading above 50 indicates slower deliveries) were off 0.1% from November, growing faster, at a slower rate, for the third consecutive month, with seven sectors reporting slower deliveries;
• Prices, at 57.4, fell 0.9%, increasing, at a slower rate, for the 79^th consecutive month, with 11 sectors reporting growth; and
• Inventories, at 49.6, were down 5.8%, contracting after growing in November, with seven sectors reporting growth

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

A Construction panelist explained that congestion at the Panama Canal is expected to continue for the next several months, adding that the effect of it is rerouting marine cargoes at the expense of cost and schedule. And a Mining panelist said that production and sales are up, with prices down.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that the 7.4% decrease in December Employment represents a disconnect when compared to the 216,000 U.S. jobs added in December, which the U.S. Department of Labor reported on January 5.

“You need to keep in mind that we are measuring directional change month-over-month,” he said. “People are saying where they hire the same or less month-over-month, and they did not hire as much as they did in the prior month. You can add jobs; it is just that they added more jobs in the prior month. That is what the question is and is why the diffusion index comes into play.”

As for other metrics in the report, Nieves said that ISM member panelists are indicating that the supply chain improvements, capacity, and deliveries are indicating that conditions are nearly back to pre-pandemic levels, with the major exception being reduced demand levels.

“We don't have that strong demand that we had back then,” he explained. “There is demand, but it's just not as strong so you have a little bit less demand and improved capacity in the supply chain, and that's why you're seeing what you're seeing. Backlog and supplier deliveries are so integrated. And then you look at inventories, they decreased because they were in a build-up going into the holiday season. Now, everyone's going looking for cash liquidity and correction by year-end, for the books, and they don't need as much as they did and with the supply chain improvements, especially in this sector, it's more demand pull—you don't have to carry as long of an inventory because of the cycle time.”

Addressing Prices, which have increased for 79 months through December, coupled with the ISM’s recently-released Semiannual Report, which noted that services sector prices are not increasing at the same strong levels as in the past, Nieves said it is reasonable to expect low-percentage increases over the first half of 2024.

“As fuel goes, that is how pricing goes for many industries, like overland trucking,” he said. “Food prices are the same, with prices continuing to rise, too, as seen as restaurants with higher prices and smaller portions.”

When asked about overall expectations for the services sector in 2024, Nieves said he is optimistic but also cautious, too.

“In December 2022, we were contracting, followed by a nice bounce back in January,” he said. “I expect January to be sideways, and it might even pull back a little bit because of the post-holiday lull, which is historically what we have seen, with things usually picking up in the latter part of the month. I am hoping we are around the same level, if not pop up a little bit. And I think we will stay along those lines going through the first quarter and possibly into the second quarter and pick up, as our respondents are indicating, into the second half of the year.”