The March ISM services index fell to 51.2 from 55.1 and that was below the forecast of 54.4. That’s the 2nd lowest read, not including Covid, since January 2010. New orders have been pretty volatile over the past 6 months as it fell 10 pts in December, bounced by 15 pts in January, held steady in February and dropped 10.4 pts in March at 52.2. Backlogs fell back below 50 at 48.5 from 52.8 in February while inventories lifted by 2.2 pts to 52.8, the highest since March 2021. Supplier deliveries (supply constraints) eased further and prices paid declined by 6.1 pts to 59.5, the lowest since July 2020 (measuring direction, not degree). Export orders (only a few service companies report them) fell a sharp 18 pts to just 43.7. Finally, and after ADP and ahead of BLS on Friday, the employment component fell 2.7 pts to 51.3, thus reflecting a modest pace of hiring.
Of the 18 industries surveyed, 13 saw growth, the same number seen in February, while 5 experienced a contraction vs 4 last month.
The bottom line from the ISM was this, “There has been a pullback in the rate of growth for the services sector, attributed mainly to 1)a cooling off in the new orders growth rate, 2)an employment environment that varies by industry and 3)continued improvements in capacity and logistics, a positive impact on supplier performance. The majority of respondents report a positive outlook on business conditions.”
My bottom line here, easing of supply chains is certainly a relief but businesses are now struggling with faltering end demand as seen with the drop in new orders at the same time inventories still remain elevated and backlogs are back below 50. While prices paid fell notably, see below what S&P Global said about companies raising prices.
The S&P Global ISM US services index improved to 52.6 from 50.6 in February and which follows 7 months in a row below 50. They said “Domestic demand continued to support the increase, as new export orders fell further, albeit at only a fractional pace.” With respect to the outlook, “Despite stronger demand conditions, business confidence was below the series average and dipped from February amid inflation concerns.” Prices paid here fell too but something the ISM didn’t capture was prices received and S&P Global said, “efforts to pass through higher costs to clients resulted in a steep and accelerated increase in selling prices.” I bolded the comment and you’ve heard me talk a lot over the past year about companies wanting to recapture lost profit margins even if their own internal price pressures ease.
On the weak ISM, yields are falling further with the 2 yr yield now lower by 12 bps on the day and by 31 bps on the week, notwithstanding what Jim Bullard and Loretta Mester foresee. The 10 yr yield is now down by almost 20 bps on the day.
Here were some notable quotes from ISM:
“Restaurant sales remain favorable compared to pre-pandemic trends. Traffic is recovering and nearly flat. We are optimistic about the coming months and have invested in building remodeling and equipment, as well as a new back office and POS (point of sale) system.” [Accommodation & Food Services]
“Sales continue to increase even as interest rates moderately increase. Most suppliers feel their supply chains are back to normal, with inventories climbing and delivery times improving. (We) fear this will have a detrimental effect in a six- to 12-month time frame.” [Construction]
“Close of first quarter business conditions are steady. Already projecting out for 2024. Economic uncertainty is still a concern, and interest rates are continuing to be monitored closely.” [Finance & Insurance]
“Slowdown in the economy is leading to reduced expenditure amounts.” [Information]
“There continues to be uncertainty in the market regarding future investments. Interest rate hikes seem to have done little to slow down consumer spending. The likelihood of a mild slowdown in the second half of 2023 or 2024 is still pretty high. Layoffs will continue.” [Professional, Scientific & Technical Services]
“Supply is starting to stabilize. Prices are coming down but in small increments. Food prices remain high, and availability continues to be a challenge.” [Transportation & Warehousing]
ISM Services
New Orders
Prices Paid