Services-Sector Survey Suggests Continued Price Pressures and Perhaps Some Weakening in Demand
The Institute for Supply Management’s composite services index decreased to 57.1 percent in April, falling 1.2 points from 58.3 percent in the prior month. The index remains above neutral and suggests the 23rd consecutive month of expansion for the services sector, though the pace may have slowed somewhat (see top of first chart). Some respondents to the survey suggest that ongoing price pressures may be starting to impact demand.
Among the key components of the services composite index, the business activity index gained 3.6 points to 59.1 (see top of first chart). That is the 23rd month above 50 and generally in line with the 2010 through 2019 period.
However, the services new-orders index fell to 54.6 percent from 60.1 percent in March, a drop of 5.5 percentage points and the second lowest result of the current expansion and well below the 69.0 reading from October 2021 (see bottom of first chart). Still, the new orders index has been above 50 percent for 23 months.
The nonmanufacturing new-export-orders index, a separate index that measures only orders for export, also weakened in April, coming in at 58.1 versus 61.0 percent in March. Six industries reported growth in export orders against four reporting declines. However, for all respondents, only about 22 percent said they perform and track separately activity outside the US.
Backlogs of orders in the services sector likely grew again in April but at a slower pace as the index decreased to 59.4 percent from 64.5 percent. April was the 16th month in a row with rising backlogs. Eleven industries reported higher backlogs in April while one reported a decrease.
The services employment index declined in April, coming in at 49.5 percent, down from 54.0 percent in March. That is the second time in the last three months that the employment index fell below neutral (see bottom of first chart). The weak reading reflects lack of supply rather than lack of demand.
Ten industries reported growth in employment while five reported a reduction. Respondents suggest qualified labor is in short supply and competition remains intense.
Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 65.1 percent, up from 63.4 percent in the prior month, an elevated result (see top of second chart). It suggests suppliers are falling further behind in delivering supplies to services business, and the slippage accelerated slightly from the prior month. The overall level of the index is high by historical comparison and is consistent with the survey of manufacturers. Sixteen industries reported slower deliveries in April while one reported faster deliveries.
The nonmanufacturing prices paid index rose to a record-high 84.6 percent, up from 83.8 percent in March (see bottom of second chart). All eighteen industries reported paying higher prices for inputs in April. Price pressures remain intense for both the services and manufacturing sectors (see bottom of second chart).
The latest report from the Institute of Supply Management suggests that the services sector and the broader economy expanded for the 23rd consecutive month in April. Respondents to the survey continue to highlight intense price pressures, materials and labor shortages, and logistics and transportation issues. There were also a few comments on some signs of softening demand. The challenging operating conditions combined with the Russian war in Ukraine, renewed lockdowns in China, and the start of a new Fed tightening cycle are threatening the economic outlook. Caution is warranted.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
