Peter Boockvar

The February ISM services index was little changed m/o/m at 55.1 vs 55.2 in January but that was just above the estimate of 54.5. New orders were higher by 2.2 pts to 62.6 after jumping by about 15 pts in the month before. Backlogs were steady at 52.8 while inventories got back above 50 for the first time since last May at 50.6 Employment was a bright spot, rising by 4 pts to 54 and that is the best since December 2021. ISM saw an “increase in applications resulting in more new hires.” Export orders after jumping by 11 pts last month, rose another 2.7 its to 61.7. Supplier deliveries fell back below 50 to 47.6, reflecting the quickest delivery since June 2009 (measuring direction, not degree) and prices paid dropped by 2 its to 65.6. 

Industry breadth improved with 13 industries of 18 asked seeing growth vs 10 in January. Four saw a decline in activity vs 8 last month. 

This was the most interesting quote that I saw from a company in the ‘Information’ sector which of course includes tech but we don’t know exactly what area and touches upon the profit margin challenge:

“The current dynamics in the marketplace are such that it is getting harder to reduce costs. Most industries are being pinched by inflation and more expensive labor markets. Before, cost reduction was the goal; it’s now cost avoidance. That said, since we’re not able to reduce cost to maintain margins, we have to reduce the employee base more aggressively to achieve margins.” 

The rest of the comments were mixed. 

“Seeing a slow decline in activity, but not a collapse like in 2009.” [Mgmt of Companies and Support Services]

“Continual effort to right size inventory to match lower sales forecasts for the coming year.” [Retail Trade]

“Activity is steady. Costs continue to escalate, eliminating any profit we had hoped for in the first and second quarters.” [Construction] Again, profit margin challenge.

“Starting the new business cycle with a noticeable uptick in demand.” [Professional, Scientific & Technical Services]

A full picture of US services is not complete unless we also look at the S&P Global report (not an apples to apples match with ISM in terms of industries included and also has small and medium sized businesses that ISM doesn’t survey). It’s February index was 50.6, around the breakeven level but above 50 for the first time since last June. 

S&P Global said “The upturn was led by a revival in spending on services by consumers and improved activity in the tech sector, but was also aided by a marked cooling in the recent downturn in financial services (helped by rally in markets in January I’m sure). 

New orders though are below 50 but a bit less so. “The impact of higher interest rates and inflationary pressures remained a drag on customer spending, according to survey respondents.” Employment was slightly above 50 but the best since last September. 

On pricing, “Despite a softer increase in cost burdens, service providers raised their selling prices at a sharper pace in February. The rate of charge inflation was the quickest since October 2022 and strong overall. Survey respondents commonly noted that higher output charges were due to the pass-through of greater costs to clients.” 

I can only interpret this last point to again highlighting how sticky inflation will be, even if at a slower rate of increase. 

Bottom line, outside of the slowdown in housing, growing affordability issues in autos, the downturn in manufacturing and the countless times we heard about the ‘challenged’ consumer from a variety of retailers this week and last, the US economy refuses to quit. While at best it won’t grow that much this year, after 1% growth in 2022, the pushes and pulls are creating this uneven economic situation that definitely confuses me but still feels like we’re in this death by thousand cuts environment in the coming year plus as long as interest rates stay high for a while as it chips away at cash flow as more goes to interest payments. 

Separately, I just read the Costco earnings conference call transcript and here are some notable quotes:

“Now, a few comments regarding inflation. It continues to seem to improve somewhat.” In their quarter ended last August they estimated 8% y/o/y price inflation for that prior fiscal year. In their first quarter they lowered that to 6-7%. In Q2, “we estimate that the equivalent y/o/y inflation number has come down to 5-6% range, and even a little lower than that towards the end of the quarter according to the buyers.”  

Their inventory levels are down 2% y/o/y as “we were a bit over-inventories last year as a result of supply chain challenges causing the inventory to be backed up at the ports.” 

As seen with Walmart, food sales were the bright spot and non foods soft. “Food and sundries were up low double digits. Cooler, food and sundries were the strongest. Fresh foods were up mid single digits. Better performing departments included bakery and meat. Non-foods were negative mid single digits.” With respect to the latter, “we’ve seen some weakness in what I’ll call, big ticket discretionary items.”