ISM chart and excerpts below by permission from the Institute for Supply Management^® ISM^®

The February 2024 Services ISM^® Report On Business^® is an interesting bag of hot and cold this month. (Emphasis Mine)

Economic activity in the services sector expanded in February for the 14th consecutive month as the Services PMI^® registered 52.6 percent, say the nation’s purchasing and supply executives in the latest Services ISM^® Report On Business^®. The sector has grown in 44 of the last 45 months, with the lone contraction in December 2022.

The report was issued today by Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management^®.

“The Supplier Deliveries Index registered 48.9 percent, 3.5 percentage points lower than the 52.4 percent recorded in January. The index returned to contraction — indicating that supplier delivery performance was faster after one month in expansion (or ‘slower’) territory. In the last 12 months, the average reading of 48.7 percent (with a low of 45.8 in March) reflects the fastest supplier delivery performance since December 2022, when the index registered 48.5 percent.

Supplier Deliveries is the only ISM^® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.

“Fourteen industries reported growth in February. The Services PMI®, by being above 50 percent for the 14th consecutive month (after a single month of contraction in December 2022 and a prior 30-month period of expansion), continues to indicate sustained growth — but at a slightly slower rate in February — for the sector.”

Nieves continues, “The slight decrease in the rate of growth in February is a result of faster supplier deliveries and the contraction in the Employment Index. The majority of respondents are mostly positive about business conditions. Respondents remain concerned about inflation, employment and ongoing geopolitical conflicts.”

Respondent Comments (Emphasis Mine)

• “Red Sea issues have not yet impacted our purchasing conditions, but we continue to monitor the situation very closely.” [Accommodation & Food Services]
• “Business remains strong across the U.S. industrial construction sector. Construction materials levels have returned to pre-coronavirus pandemic levels, and the outlook for 2024 is strong.” [Construction]
• “Continued inflationary pressures and labor price increases are challenging, but we continue to push forward.” [Health Care & Social Assistance]
• “Employers remain cautious about hiring direct employees and are considering utilizing contract labor to cover project and interim work demands as concerns about the economy continue to be front of mind.” [Management of Companies & Support Services]
• “Commodity prices have dropped in the last quarter, although they have been range-bound over the last year. Production continues steady increase.” [Mining]
• “We are experiencing stabilization from external economic influences. The past 12 months brought significant external shifts that resulted in fairly sizable changes to business objectives and financials. Now that we have absorbed changes and restructured strategic plans, we are on a course for a successful 2024.” [Professional, Scientific & Technical Services]
• “Economy seems unsettled. Inflationary fears persist, yet some things are settling down. High demand for services, although inquiries from contractors for opportunities seem to be only inching upward. Layoffs in many large industries, but many businesses are desperate for workers. Lots of contradictions.” [Public Administration]
• “Business is good. Inflation is under control and trending downward. Pricing of commodities is going up at a slower pace. Manufacturing is good, with no sign of any change in the near future.” [Retail Trade]
• “Labor continues to be in highest demand. Finding qualified and available crews and administrative staff (is still) difficult. Brass fittings and electrical equipment lead times are still very long.” [Utilities]
• “Moderate increases in business activity so far. Improved supplier fill rates and steady pricing have resulted in increased levels of restocking as businesses prepare for spring and summer selling seasons.” [Wholesale Trade]

Key Points

Price inflation is notable. Prices are up 81 consecutive months. 58.6 percent of respondents say prices rose in February, That’s down from a whopping 64 percent last month.

Business activity rose for 45 straight months. But some cracks have appeared in employment and deliveries.

The backlog of orders is barely above contraction which confirms faster deliveries.

With faster deliveries and reduced backlogs, employment rates to be weak, which it is. Nonetheless, some industries are having difficulty finding skilled workers.

Hints of Stagflation

The report is a mixed bag that hints at stagflation. It does not suggest imminent rate cuts by the Fed.

“Pent-Up Exuberance”

Also see The Atlanta Fed on “Pent-Up Exuberance” and Threat of More Inflation

Atlanta Fed President, Raphael Bostic, is concerned about another round of inflation caused by “Pent-Up Exuberance”.

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