Services sector sees growth for the 11th consecutive month, reports ISM

November services economy activity remained in growth mode, 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 52.7 (a reading of 50 or higher signals growth)—increased 0.9, growing, at a faster rate, for the 11th consecutive month. ISM said that the services sector has seen growth in 41 of the last 42 months, with December 2022 being the one month with a decline. 

The November Services PMI posted its highest reading over the last 12 months, with December 2022’s 49.2 marking lowest reading for that period.

ISM reported that 15 of the 18 services sectors it tracks saw gains in November, including: Agriculture, Forestry, Fishing & Hunting; Health Care & Social Assistance; Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Transportation & Warehousing; Retail Trade; Utilities; Accommodation & Food Services; Other Services; Management of Companies & Support Services; Finance & Insurance; Public Administration; Construction; Wholesale Trade; and Educational Services. Sectors posting annual declines in November included: Information; Mining; and Professional, Scientific & Technical Services.

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

• Business Activity/Production, at 55.1, increased 1.0%, growing, at a faster rate, for the 42nd consecutive month, with 11 sectors reporting growth;
• New Orders, at 55.5, were flat, growing, at the same rate, for the 11th consecutive month, with 11 sectors reporting growth;
• Employment, at 50.7, rose 0.5%, growing, at a faster rate, for the sixth consecutive month, with 10 sectors reporting growth;
• Backlog of Orders, at 49.1, fell 1.8%, contracting, after growing in October, with four sectors reporting growth;
• Supplier Deliveries, at 49.6, (a reading above 50 indicates slower deliveries) were off 2.1% from October, growing faster, at a slower rate, for the second consecutive month, with six sectors reporting slower deliveries;
• Prices, at 58.3, fell 0.3%, increasing, at a faster rate, for the 78^th consecutive month, with 11 sectors reporting growth; and
• Inventories, at 55.4, were up 5.9%, growing after contracting in October, with eight sectors reporting growth

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

“Signs of recovery are on the horizon — (profit) margins remain tight, but revenue is improving and labor appears to be stabilizing,” said a Health Care & Social Assistance panelist. “Supply chains are operating well, but a few major manufacturers continue to show signs of constraints that have persisted for some time. Capital investment remains constrained; however, optimism has returned for a turnaround in calendar year 2024.”

And a Transportation & Warehousing panelist pointed to solid activity heading into the final stretch of the fourth quarter. A retail trade panelist observed that candidate expectations during the hiring process have made staffing up more difficult.

Tony Nieves, Chair of the ISM’s Services Business Survey Committee, said in an interview that with the services sector seeing growth for 11 consecutive months, the PMI has largely been hovering in the low-to-mid-50s range, with November’s reading topping industry expectations.

Addressing some of the report’s key data findings, Nieves said that even though New Orders were flat, it serves as an indication that ISM’s services sectors respondents feel pretty good heading into the first quarter of 2024, in terms of what is in the pipeline.

“The opportunity is there [with New Orders],” he said. “Employment looks like the same story every month, with some sectors not backfilling and others not able to find the right workers. Supplier deliveries are still moving faster, and backlog was down. We have had such improved capacity in the supply chain, and sales activity—not meaning current production or output capabilities. Inventories were a combination of things, including a ramp-up for the holiday season, and flu season with PPE being purchased falls into supply being a little higher than demand and that’s based on expectations and the holiday season.

Looking at the November Prices’ reading, Nieves explained that it remains a challenge, in that they continue to increase, while having seen some moderation.

“You would like to see prices in the lower-50s range,” he said. “Anything to interest rate reduction…the Fed is saying it is not going to raise the rate, but I would still like to see it come down, because some panelists are saying that the high interest rates are an impediment towards capital investment right now.”

When asked how he thinks the services sector will end 2023, Nieves said the NMI is likely to be flat or see a mild uptick, with the caveat that it is hard to tell.

“Last December, I never thought we would have had contraction, and we did, but then rebounded right away in January and February, so it is hard to be surprised at this point.

Going back to when pandemic restrictions lifted in 2021 and 2022 and services-based activity rapidly picked up, Nieves said steady, incremental growth is preferred, as opposed to a more “churn and burn”-type of pace.

“When things spike up real high, everyone gets these [heightened] expectations, and all of a sudden the bottom falls out,” he said. “A steadier pace is preferred.”