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 latest ISM Services Index for February came in at 55.1%, better than expected, but down from January by 0.1 percentage point, which indicates slower growth and is below its 12-month average. The more specific ISM Services Business Activity Index measures the changes in the level of business activity in the series. The Business Activity Index for February registered at 56.3%, down from 60.4% in January, also reporting slower growth. While both of these Indexes remain in expansion territory, it is clear that there’s been a trend down over the last 12 months (see inset chart).
This morning’s report noted that 13 out of 17 industries reported growth in February. Those that reported contraction were Wholesale Trade; Transportation & Warehousing; Information; and Management of Companies & Support Services. Of the 11 components tracked in the survey, 6 reported declines, albeit slight, in February: Business Activity, Supplier Deliveries (faster deliveries), Prices Paid (indicating increasing prices), Order Backlog, Imports, and Inventory Sentiment.
While generally considered a positive report, what was striking were some of the comments that survey respondents provided:
- “Activity is steady. Costs continue to escalate, eliminating any profit we had hoped for in the first and second quarters.” [Construction]
- “Upward pricing pressures have eased slightly but are still elevated.” [Finance & Insurance]
- “Inflation, though somewhat eased from the peaks of the past six months, continues to drive higher-pricing demands from suppliers. Hospital volumes are improving but have not returned to pre-pandemic levels in all cases.” [Health Care & Social Assistance]
- “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.” [Information]
- “Continual effort to right-size inventory to match lower sales forecasts for the coming year.” [Retail Trade]
These statements highlight the challenges faced by individual corporations as they battle an environment of slowing growth and persistent inflationary pressures.