ISM Services

The Institute for Supply Management (ISM) Services report, released on the third business day of each month for the previous month, surveys purchasing and supply executives around the country in over 20 service industries like legal services, entertainment, real estate, professional, and finance & insurance. Levels above 50 indicate expansion while below 50 imply contraction. The index includes the following components: Business Activity, New Orders, Employment, Supplier Deliveries, Inventories, Prices Paid, Backlog of Orders, New Export Orders, Imports, and Inventory Sentiment.

The latest ISM Services Index for August came in at 54.5%, better than expected and a 1.8 percentage point increase from the July reading of 52.7. Almost all components of the index improved, indicating growth at a faster pace. The lone component that contracted is Backlog of Orders, which was down 10.3 percentage points in August, its largest monthly contraction since the start of the series in July 1997 (see graph below). Outside of the pandemic, the Backlog of Orders Index has never been at this level without a recession. It’s also worth noting that inventories rose sharply alongside this significant decline in order backlog.  This dynamic implies that demand could be softening for the services sector. According to the report, the overall services economy continued to grow for the eighth consecutive month.

Here are a few interesting excerpts from survey respondents:

“While labor costs continue to soften, costs of pharmaceuticals and supplies remain stubbornly high, negatively impacting operating margins. Supply chains are operating consistently, though some categories of supply remain constrained. Patient volumes and revenues were down slightly (for the month) but appear to be rebounding as back-to-school season approaches. Forecast remains cautiously optimistic.” [Health Care & Social Assistance]

“The summer slowdown is similar to those in recent years due to vacations. Third-quarter projections are close to expectation. Inflationary costs are mostly in fuel and fuel-related commodities, having an adverse effect on profits.” [Professional, Scientific & Technical Services]

“Overall conditions seem quite good, although there is definite slowdown in residential construction driven by rapidly increasing interest rates.” [Real Estate, Rental & Leasing]

“Business activity continues to be lower year over year, but we are meeting the year-to-date forecast.” [Retail Trade]