The service sector has benefited from the shift in consumer spending away from goods normally purchased on credit.
The US services sector grew steadily in February, with new orders and employment reaching their highest in more than a year, suggesting the economy continued to expand in the first quarter.
A survey by the Institute for Supply Management (ISM) on Friday described companies as “mostly positive about business conditions.” The survey added to strong consumer spending and the labor market by suggesting the economy is nowhere near recession. However, the resilience of the economy may keep the Federal Reserve from raising rates until midyear.
“Activity hasn’t slowed down much, and it continues to put pressure on prices and margins,” said Tim Quinlan, senior economist at Wells Fargo & Co. in Charlotte, N.C. “The fact that this is happening in tandem with job growth gives the Fed the green light for further rate hikes.”
The ISM non-manufacturing PMI fell to 55.1 from 55.2 in January. Numbers above 50 indicate growth in the services sector, which accounts for more than two-thirds of the economy. The PMI is well above the 49.9 level and the ISM says it shows growth across the economy over time. Economists polled by Reuters had expected the nonmanufacturing PMI to fall to 54.5.
Thirteen service industries reported growth last month, including construction, retail, accommodation, food services and professional, scientific and technical services. Wholesale and information were among the four that reported contractions.
Comments from companies were mixed. The lodging and restaurant industries are expected to perform well overall despite the headwinds of the economy. Professional, scientific and technical service companies are “starting a new business cycle with a notable increase in demand,” it said.
Firms that manage businesses and provide support services reported a slowdown in activity, but did not see a “2009-like collapse.” Companies in the information sector said it was “increasingly difficult to cut costs”, adding that they “needed to reduce their employee base more aggressively to achieve margins”.
Overall, the services sector has benefited from a shift in consumer spending away from goods typically purchased on credit. The ISM on Wednesday said February’s manufacturing PMI contracted for the fourth month in a row.
Last month, the ISM survey gauge of new orders received by service firms increased from 60.4 in January to 62.6, the highest level since November 2021.
According to ISM, comments from companies ranged from “increased requests for services and components” to “customers starting to pick up for the spring season.”
US stocks traded higher. The dollar fell against a basket of currencies. US Treasury prices rose.
Greatly improved supply
The service sector is now at the center of the fight against inflation.
The labor market remains tight and inflation is stubbornly high, making it more likely that the Fed will raise interest rates not twice this year, but at least three more times.
The US Central Bank has raised its policy rate by 450 basis points since March last year, from near zero to the current 4.5% to 4.75% range.
The measure of prices paid by the services sector for inputs fell to a two-year low of 65.6 from 67.8 in January. Some economists regard the ISM service fee gauge as a good predictor of personal consumption expenditure (PCE) inflation. The Fed, which has a 2% inflation target, tracks his PCE price index for monetary policy. Sixteen service industries reported increases in prices paid last month. Only accommodation and food services reported declines.
Despite significant improvements in the supply chain, prices remained elevated. The survey’s service industry supplier delivery measure fell to 47.6, marking the fastest delivery performance since June 2009 from 50.0 in January. A reading less than 50 indicates fast delivery.
“Strong demand for services will keep inflation going and could put pressure on the Fed to keep raising rates,” said Priscilla Thiagamorthy, senior economist at BMO Capital Markets in Toronto.
Employment increased last month, with the survey’s measure of employment in the service sector rising to 54. This is the highest since December 2021 and up from 50 in January. Anthony Nieves, chair of the ISM Services Business Survey Committee, explained that employment conditions “have improved in some industries”, but that “some industries reported continued contractions”. says.