The December ISM services index has now joined its manufacturing brethren in printing below 50. The index fell to 49.6 from 56.5 in November. Not including Covid, this is the first time we’ve seen a below 50 figure since December 2009. New orders plunged by 10.8 pts to 45.2 while backlogs fell a modest .3 pts to 51.5. Inventories remained below 50 at 45.1, a 3 month low as retailers work off excess inventory. Employment dropped by 1.7 pts to back below 50 at 49.8. Supplier deliveries eased again, falling below 50 at 48.5. Prices paid were down by 2.4 pts but still elevated at 67.6. Export orders got back what it lost last month but is below 50 for a 3rd month.
Of the 18 industries surveyed, 11 saw growth and 6 saw a contraction with 1 reporting no change. That compares with 13 seeing growth in November and 3 a contraction. It was back in June when all 18 saw growth. Just 5 industries said they saw an increase in new orders and employment.
With respect to new orders, the ISM gave this comment from a respondent, “orders from customers are softening, and some orders are being canceled.” A few comments on employment, “We have lost employees due to normal attrition and are having issues backfilling positions” and “Our company has tightened hiring of new employees month over month, due to uncertainty around the strength of the economy going into 2023.” With supplier deliveries, one company said “supply chain catching up to demand.” On inventories, “trying to lower inventory for calendar year end” and “still working through excess supply.” With respect to backlogs, here were some company comments, “Slowing customer demand, combined with increased supplier shipments and more availability” and “Many suppliers are catching up in their deliveries.”
Bottom line, the US economy continues to weaken and that is now spreading into services. US Treasuries are adding to their rally, the dollar is at the low of the day and stocks like Pavlov’s dog is rallying on the economic weakness because of what that means for the Fed. The 2 yr yield is now down 13 bps after rising by 10 bps yesterday. The 10 yr is lower by 10 bps to near a 3 week low. The fed funds futures now prices in just a 22% chance that the Fed will hike by 50 bps in February. I’ll argue again that the Fed is almost done hiking rates with maybe 50 bps more, 25 bps in February and another thereafter. That said, Raphael Bostic, a non voting member this year, reiterated on CNBC just now what we read in the minutes, that rates are not going to fall in 2023. Take that with a grain of salt though as it’s only January.
ISM Services
New Orders