Services Firms ‘Exhausted’ By ‘Relentless’ Distortions

The last of this week’s top-tier US data came in soft. Not soft enough to change any narratives, especially given the proximity to May’s jobs report, but soft nevertheless.

Services activity in the world’s largest (services-driven) economy cooled more than expected in May, even as the pace was still indicative of a fairly robust expansion.

At 55.9, ISM’s gauge printed below estimates (56.5) and near the bottom-end of the range (54.3 to 60). It was the weakest print since February 2021 (figure below).

The final read on S&P Global’s index, also released Friday, was a touch lower than the flash print.

Under the hood, ISM didn’t feel uniformly bad, although everything could aptly be described as “mixed” in the current environment. Although the business activity index retreated nearly five points, new orders rose and the employment gauge moved back into expansion territory after dipping to 49.5 in April. Delivery times improved, and the prices paid index, although still perched at nosebleed levels, dropped to the lowest since September.

“COVID-19 continues to disrupt the services sector, as well as the war in Ukraine,” Anthony Nieves, Chair of ISM’s services survey committee, said, in a statement. “Labor is still a big issue, and prices continue to increase.”

The color accompanying the S&P Global release wasn’t particularly encouraging. “Although output charges increased at a slower rate than April’s survey high, the rise was marked overall and reflected soaring input prices, which increased at the sharpest pace on record,” the survey noted.

Respondents to ISM cited long lead times, scarce labor, high freight costs, unstable prices and generalized shortages. Sound familiar?

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, adopted an overtly cautious tone, noting that when considered alongside the slowdown in manufacturing, May’s deceleration in the pace of services sector growth suggests the US economy is expanding at the “weakest [rate] so far in the pandemic recovery with the sole exception of January, at the height of the Omicron wave.”

Further, Williamson said that although survey readings are still consistent with GDP returning to growth in the second quarter, “it is worrying that growth momentum is being lost so quickly.” I’d remind readers that virtually no one on Wall Street currently expects the US to be declared in recession when this quarter’s preliminary GDP data is released. It’s not out of the question, though.

Perhaps the “best” (note the scare quotes) anecdote came from an ISM respondent in Utilities. “Exhausting. Continuous shortages, transportation delays and price increases all contribute to the destruction of historical lead times and firm commitments on delivery dates,” the person said, venting. “This requires placing orders earlier and qualifying secondary sources. It is relentless.”

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