(Click on image to enlarge)

Chart and excerpts by permission from the Institute for Supply Management ® ISM® 

Please consider the February 2023 Services ISM^® Report On Business^®

Economic activity in the services sector expanded in February for the second consecutive month as the Services PMI^® registered 55.1 percent. The sector has grown in 32 of the last 33 months, with the lone contraction in December.

Both the ISM and S&P 500 have reserved the "PMI" acronym. Thus the term PMI can be more than a bit confusing. 

With that out of the way, let's see what the S&P has to say.

S&P Global US Services PMI™

Also, consider the S&P Global US Services PMI™

Key Findings (Emphasis Mine)

• Activity returns to expansion, albeit at only a slight pace 
• Employment rises at fastest rate since September 2022 
• Selling price inflation accelerates despite softer rise in costs 

The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 50.6 in February, up notably from 46.8 in January and broadly in line with the earlier released 'flash' estimate of 50.5. The latest data signalled only a marginal uptick in business activity, but brought to an end a seven-month sequence of contraction. Where an increase in output was reported, firms linked this to signs of a pick-up in demand conditions and a slower fall in new orders, with some evidence of milder than usual weather also helping. 

New export orders declined for the ninth month running midway through the first quarter. Although falling at the slowest pace since last September, the pace of contraction was solid overall. Firms mentioned that challenging demand conditions and uncertainty in key export markets hampered any upturn.

Although the S&P PMI and the ISM cover the same industry, and both are diffusion indexes, there is normally a huge disconnect between the reports. 

This month is no different. Diffusion indexes have a flaw in that only direction matters, not size.

For example, a firm hiring 3 people will offset another firm firing 200 workers.

Everyone closely watches the ISM, but there is no particular reason to believe one report over another other than sample size. Econoday reports the ISM sample size is "several hundred" while the S&P sample size is "over 400".

Rather than spotlight the differences, let's talk about about key similarities.

Despite a softer increase in cost burdens, service providers raised their selling prices at a sharper pace in February. The rate of charge inflation was the quickest since October 2022 and strong overall. Survey respondents commonly noted that higher output charges were due to the pass-through of greater costs to clients. 

Chris Williamson, S&P Chief Business Economist Comments 

• "A return to growth of US service sector business activity in February for the first time in eight months has offset a decline in manufacturing output, helping stabilize the economy and hopefully avert a downturn in the first quarter.
• "Across both services and manufacturing, jobs growth has risen to a five-month high as business confidence about the year ahead has perked up to its highest since last May, reviving further from the low-point seen last October. Clearly the gloom heading into the winter has been replaced with brighter prospects moving into the spring. 
• "This improving picture has, however, added to firms' pricing power. Having fallen to a 27-month low in January, the rate of inflation for goods and services reaccelerated in February to its highest since last October as companies reported greater success in passing higher costs on to customers." 

Regardless of which report you wish to believe, both show pricing power in the service sector. The ISM reports increasing prices by 65.6% of respondents. 

Labor Productivity and Costs, a Big Inflation Problem in Pictures

Yesterday, I noted Labor Productivity and Costs, a Big Inflation Problem in Pictures

Price pressures have returned. The Fed has work to do. 

More By This Author: