(Click on image to enlarge)

ISM table courtesy of ISM, by Permission 

The September 2022 Services ISM^® Report On Business^® is reasonably strong as expected in this corner but the comments ring true to what's happening. 

Key Points 

• “The Supplier Deliveries Index registered 53.9 percent, 0.6 percentage point lower than the 54.5 percent reported in August. (Supplier Deliveries is the only ISM® Report On Business® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.)
• “The Prices Index decreased for the fifth consecutive month in September, down 2.8 percentage points to 68.7 percent. Services businesses still continue to struggle to replenish their stocks, as the Inventories Index contracted for the fourth consecutive month; the reading of 44.1 percent is down 2.1 percentage points from August’s figure of 46.2 percent. The Inventory Sentiment Index (47.2 percent, up 0.1 percentage point from August’s reading of 47.1 percent) contracted for the second consecutive month in September.”
• “According to the Services PMI®, 15 industries reported growth. The composite index indicated growth for the 28th consecutive month after a two-month contraction in April and May 2020. Growth continues — at a slightly slower rate — for the services sector, which has expanded for all but two of the last 152 months. The services sector had a slight pullback in growth for the month of September due to decreases in business activity and new orders. Employment improved and supplier deliveries slowed at a slightly slower rate. Based on comments from Business Survey Committee respondents, there have been improvements regarding supply chain efficiency, operating capacity and materials availability; however, performance remains less than ideal. Employment continued to improve despite the restricted labor market.”

That sounds rosy but consider the comments, emphasis mine.

What Respondents Are Saying

• “Sales at our restaurants seasonally trend down from August to October, and this year seems to be more severe compared to before the pandemic. General inflation concerns and consumer uncertainty are the likely causes, expressed by industry peers as well.” [Accommodation & Food Services]
• “General slowdown in sales. We believe high commodity prices and inflation have impacted consumers’ desire for fertilizer from our turf and ornamental division. Farmers have already cut back on consumption due to pricing and weather-related issues.” [Agriculture, Forestry, Fishing & Hunting]
• “September is one of our slowest months of the year. We are gearing up to have a very busy fourth quarter and are seeing some signs of relief in our supply chain.” [Arts, Entertainment & Recreation]
• “Sales have slowed significantly. Very challenging market. Trying to build through backlog. Manufacturers, distributors and installation trades are still busy and passing on price increases, while we are discounting homes to stimulate sales. Margins are compressing.” [Construction]
• “Due to supply chain issues and inflation, we continue to limit purchases and/or start orders sooner than normal. In the higher education sector, the outlook is good for larger schools.” [Educational Services]
• “Labor pressures continue to depress business activity, as insufficient staffing levels are not allowing the hospital system to operate at capacity. Back orders remain unchanged from a month ago as shortages of raw materials — especially surgical grade Tyvek (synthetic polyethylene fiber), foam and plastics — persist and do not appear to be improving. Logistical lead times have decreased, but the impact on supply chains is limited amid product shortages.” [Health Care & Social Assistance]
• “Hiring continues to be a challenge across most industry sectors. There are far more open roles than candidates to fill them. Due to inflationary concerns, companies are being cautious about hiring direct employees and are attempting to utilize contingent labor. The lack of candidates willing to fill temporary positions is making this strategy difficult to execute.” [Professional, Scientific & Technical Services]
• “Chip shortage shows no signs of abating.” [Retail Trade]
• “Prices of fuel are leveling off (or) dropping in small increments. Still facing supply/demand issues with certain products — food, beverages, some raw construction material and semiconductor chips. Big concern is (China’s) zero-tolerance policy for COVID-19 cases. A lot of companies rely on products from China, and cities keep shutting down due to the policy. This greatly affects the orders outstanding and creates lead time uncertainty.” [Transportation & Warehousing]
• “Business activity has improved over last month but is still trending flat to slightly down versus the same period last year. Inventory levels are starting to fall from record highs, but overstocked items are still a problem. We expect lower demand and inventory rebalancing to impact business activity through the end of the calendar year.” [Wholesale Trade]

Comment Takeaways

I listed all the comments. What we don't know is if those comments are representative but they sure do not match the relatively strong numbers. 

The key takeaways from the comments are that things are slowing but there are staff shortages anyway. 

Those two points are seemingly at odds but I accept both of them. 

Construction is slowing "significantly". There's no doubt about that. There is also no doubt that "overstocked items are still a problem" in wholesale trade. 

Why the Mismatch Between Comments and Report?

The comments ring true, the numbers don't. Nor do the ISM numbers match a similar S&P services report also out today. I will post on that next. 

But these surveys are diffusion indexes with a survival bias and weighting problems as well. 

By survival bias I mean that struggling companies go out of business or do not respond. Also, diffusion indexes only show direction not magnitude. That means a company ramping up production by 0.1 percent offsets a company slowing production by 10.0 percent.

Are the companies weighted to importance to the economy? I am guessing no, but even if so, we have the direction-magnitude issue.

Why I Expect a Minimal Rise in Unemployment This Recession

Labor shortages match the BLS job reports. And as I have noted, there are over 22 million people age 60 or over, at or near retirement age, as of January. 

I will take another look at the data for an update. But the comments match my July post Why I Expect a Minimal Rise in Unemployment This Recession

Spotlight Construction

On October 3, I noted Construction Spending Unexpectedly Dives 0.7 Percent in August With Negative Revisions

That was a huge huge miss. In diffusion indexes, tiny gains elsewhere would offset big misses in construction.

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