The US services sector expanded at a slower-than-expected rate in April thanks to pervasive distortions and familiar constraints, closely-watched data out Wednesday suggested.
At 57.1, ISM’s gauge fell from March (figure below) and missed consensus, which anticipated a slight acceleration from the prior month’s pace.
The range of estimates, from more than six-dozen economists, was 55-61.
Separately, the final read on S&P Global’s gauge for April was 56, a marked improvement from the flash print, but still lower than March’s headline.
Under the hood, the ISM survey showed the business activity gauge accelerated sharply to 59.1 from 55.5. But new orders tumbled to 54.6 from above 60, while the employment gauge slipped into contraction territory.
The headline decrease was “mostly due to the restricted labor pool [which] impact[ed] the Employment Index and the slowing of new orders growth,” ISM’s Anthony Nieves said. Recall that the employment gauge in the manufacturing survey dropped precipitously last month, and sits just one point from contraction territory.
Earlier Wednesday, ADP said small businesses shed 120,000 jobs in April, the fourth-most ever.
The report betrayed evidence of familiar post-pandemic dynamics. The Supplier Deliveries Index rose to 65.1, indicating slower deliveries, and prices paid hit a new series high at 84.6. Businesses continued to stock up, but inventory sentiment remained well below 50 — firms view inventory levels as insufficient to meet demand.
The anecdotes were telling. Someone in Accommodation & Food Services cited “extreme” price pressures and scarce product availability. “Mortgage rates have skyrocketed,” a respondent in Construction remarked. The combination of sharply higher borrowing costs and record-high home prices “will temper new home demand at some point over the next 12 months,” the person said.
The color accompanying S&P Global’s survey was familiar and somewhat upbeat for an economy that lives and dies by the services sector. “It’s clear that growth could be even stronger if activity wasn’t still constrained by supply chain bottlenecks and labor availability issues,” Chris Williamson, Chief Business Economist, said. “The consequence of demand running ahead of supply is higher prices, with average charges levied for services rising at a sharply increased and unprecedented rate in April.”
Although all indications are that firms have been successful in passing along higher costs, there will be a limit. In all likelihood, we won’t know what that limit is until it’s too late.
