Services economy gets off to a solid start in 2024, reports ISM

The services economy remained on a growth track to start 2024, according to the new edition of the ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The Services PMI, at 53.4 (a reading of 50 or higher signals growth), was up 2.9% in January, growing, at a faster rate, for the 13^th consecutive month. This marks growth in 43 of the last 44 months, with December 2022 being the one month with a decline over that period. ISM added that the overall economy, like the January Services PMI, saw growth, at a faster rate, for the 13^th consecutive month as well.

The January Services PMI reading is 0.8% above the 12-month average of 52.6, with February 2023’s 55.0 representing the high for that period and December 2023’s 50.5 marking the low for that period.

ISM reported that 10 of the 18 services sectors it tracks saw gains in January, including: Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Professional, Scientific & Technical Services; Public Administration; Utilities; Accommodation & Food Services; Construction; Other Services; Educational Services; and Management of Companies & Support Services. Sectors posting decreases included: Information; Retail Trade; Real Estate, Rental & Leasing; Mining; Arts, Entertainment & Recreation; Wholesale Trade; and Finance & Insurance.

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

• Business Activity/Production, at 55.8, was even with December, growing at the same rate, for the 44th consecutive month, with 10 sectors reporting growth;
• New Orders, at 55.0, rose 2.2%, growing, at a faster rate, for the 13th consecutive month, since contracting in December 2022, with eight sectors reporting growth;
• Employment, at 50.5, increased 6.7% after decreasing 7.4% in December, growing after December’s contraction, with three sectors reporting growth;
• Backlog of Orders, at 51.5, rose 2.0%, growing after two months of decline, with seven sectors reporting an increase in order backlogs in January;
• Supplier Deliveries, at 52.4, (a reading above 50 indicates slower deliveries) were up 2.9% from December, slowing after growing faster, at a slower rate, for the third consecutive month, in December, with nine sectors reporting slower deliveries;
• Prices, at 64.0, rose 7.3%, increasing, at a faster rate, for the 80^th consecutive month, with 15 sectors reporting growth, marking the biggest monthly jump since August 2021, when it increased 9.3%; and
• Inventories, at 49.1, were down 0.5%, contracting, at a faster rate, for the second consecutive month, with eight sectors reporting growth

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

A construction panelist stated that transportation impacts of the Suez Canal, due to unrest in the Red Sea and the issues at the Panama Canal, are impacting both costs and schedules for the transport of global goods. And a retail trade panelist said that economic signals are mixed, with some sectors are booming and some—like solar and wind power, ship building and electric vehicles—slowing down. The panelist added that other downward-trending sectors are iron and steel, paper and communication equipment and also stated that overall, the economy is in good shape and there is no imminent threat of a recession.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview, that the report’s findings represented a very good start to 2024.

“Historically on a pre-pandemic basis and taking out any kind of recessionary periods, we have always have seen a little bit of a lull after the holidays, and it always picked up towards the tail end of January,” he said. “This seems to be ahead of the pace.”

Addressing the nearly 7% gain in January employment, he explained that there was some pullback in December (down 7.4%), due to the increase in employment going into the holiday season, coupled with people on vacation and out of the office during that time.

“We still have the same story as it related to employment, and it varies by industry,” he said. “We know which industries have been hammered by cuts, but others are still having trouble finding the applicable workers. They're facing competitiveness in the marketplace. Quality workers don't have trouble finding a job. Yeah. It just depends on what industry they're in. If they're in the tech industry, it could be a little shaky, but, for the most part, there's still the good quality people [out there]. They'll find something.”

Looking at December 2023 compared to December 2022, the last month to see a contraction, Nieves explained that while there was no contraction in December 2023, there are things to monitor, including geopolitical issues in the Red Sea, as well as the Panama Canal’s ongoing challenges, and the slight increase in demand and upstream material issues also need to be watched. But he said the underlying growth in the services sector is encouraging overall.

What’s more, he observed that the sector is on track with the expectations laid out in ISM’s Semiannual report issued in December, with the main reason being that there is no contraction at the moment.

“That report indicated we might see some pullback in the first half of the year, and then the second half would be better, with overall growth for the year,” he said. “We are slightly ahead of that trend now, and if things pan out that way, we will be better off for it.”

With an eye on the future, Nieves said that there are a few mixed signals in regards to the services sector, with inflation at the top of the list.

“You look at the top five industries that make a contribution to GDP, two of them this month—Health Care, Social Assistance and Professional Scientific Technical Services—have reflected growth,” he said. “You don't see Government, Public Administration, Real Estate, Rental and Leasing as the latter is definitely impacted by interest rates.”