US services sector grows steadily; prices stubbornly high
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[March 04, 2023] By
Lucia Mutikani
WASHINGTON (Reuters) - The U.S. services sector grew at a steady clip in
February, with new orders and employment rising to more than one-year
highs, suggesting the economy continued to expand in the first quarter.
The Institute for Supply Management (ISM) survey on Friday described
companies as "mostly positive about business conditions." Though a
measure of prices paid by businesses fell to the lowest level in just
over two years, it stayed elevated, indicating that high inflation could
persist.
The survey added to robust consumer spending and labor market data in
suggesting the economy was not near a recession. But the economy's
resilience could see the Federal Reserve keep hiking interest rates into
the summer.
"Activity is not slowing much and that is keeping pressure on prices and
on margins," said Tim Quinlan, a senior economist at Wells Fargo in
Charlotte, North Carolina. "The fact that this is occurring alongside an
upswing in hiring gives the Fed the green light for further rate
increases."
The ISM's non-manufacturing PMI dipped to 55.1 from a reading of 55.2 in
January. A reading above 50 indicates growth in the services industry,
which accounts for more than two-thirds of the economy. The PMI is well
above the 49.9 level, which the ISM says over time indicates growth in
the overall economy. Economists polled by Reuters had forecast the
non-manufacturing PMI would decrease to 54.5.
Thirteen services industries, including construction, retail trade,
accommodation and food services as well as professional, scientific and
technical services, reported growth last month. Wholesale trade and
information were among the four reporting a contraction.
Commentary from businesses was mixed. Accommodation and food services
businesses viewed sales activity as "generally strong, despite economic
headwinds." Professional, scientific and technical services companies
said they were "starting the new business cycle with a noticeable uptick
in demand."
While businesses that manage companies and offer support services
reported activity was slowing down, they were not seeing "a collapse
like in 2009."
Companies in the information sector said it was "getting harder to
reduce costs," adding they have had to "reduce the employee base more
aggressively to achieve margins."
Overall, the services sector is benefiting from a switch in consumer
spending from goods, which are typically bought on credit. The ISM said
on Wednesday that its manufacturing PMI contracted for a fourth straight
month in February.
The ISM survey's gauge of new orders received by services businesses
increased to 62.6 last month, the highest level since November 2021,
from 60.4 in January.
According to the ISM, comments from businesses ranged from "increased
requests for service and components" to "customers starting to ramp up
for the spring season."
Stocks on Wall Street were trading higher. The dollar fell against a
basket of currencies. U.S. Treasury prices rose.
[to top of second column] |
A "Now hiring" sign is displayed on the
window of an IN-N-OUT fast food restaurant in Encinitas, California,
U.S., May 9, 2022. REUTERS/Mike Blake
SUPPLY SIGNIFICANTLY IMPROVED
The services sector is now at the center of the fight against
inflation as services prices tend to be stickier and less responsive
to interest rate increases.
With the unemployment rate at more than a 53-year low of 3.4% and
inflation stubbornly high, the odds have increased that the Fed will
raise interest rates at least three more times this year instead of
twice.
The U.S. central bank has hiked its policy rate by 450 basis points
since last March from the near-zero level to the current 4.50%-4.75%
range, with the bulk of the increases coming between May and
December.
A measure of prices paid by services industries for inputs fell to
65.6, the lowest in January 2021, from 67.8 in January. Some
economists view the ISM services prices paid gauge as a good
predictor of personal consumption expenditures (PCE) inflation. The
Fed, which has a 2% inflation target, tracks the PCE price indexes
for monetary policy. Sixteen services industries reported an
increase in prices paid last month. Only accommodation and food
services reported a decline.
Prices continued to rise for inputs like labor, chemicals,
electrical components and lumber. Labor, computer accessories,
electronic components as well as blood collection tubes, needles and
syringes were among the inputs in short supply.
Prices remain elevated despite a significant improvement in supply
chains. The survey's measure of services industry supplier
deliveries dropped to 47.6, indicating the fastest delivery
performance since June 2009, from 50.0 in January. A reading below
50 indicates faster deliveries.
"This provides further evidence that the Fed's monetary policy
strategy is not yet having its desired effect on demand and
inflation," said Conrad DeQuadros, senior economic advisor at Brean
Capital in New York. "While the prices paid index continues to
slowly disinflate, the index is still at a level that points to
inflation well above 3%."
Hiring increased last month, with the survey's measure of services
industry employment rising to 54.0. That was the highest reading
since December 2021 and was up from 50.0 in January. Anthony Nieves,
chair of the ISM Services Business Survey Committee, described the
employment picture as having "improved for some industries," but
also noted that "several industries reported continued downsizing."
Economists expect strong employment growth in February, though the
pace probably slowed from January's blockbuster gain of 517,000
jobs. February's employment report is scheduled to be published next
Friday.
(Reporting by Lucia Mutikani; Editing by Paul Simao)
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