Hot on the heels of a cool read on US factory activity, markets were treated to evidence of a less robust expansion in the all-important services sector.
Although still indicative of reasonably healthy growth, the 54.4 headline print on ISM services for October was below consensus. Economists expected 55.3. The range of estimates, from 58 highly-trained professionals, was 53 to 56.9.
October’s print was the lowest since May of 2020 or, more to the point, the lowest of the pandemic recovery (figure below).
Meanwhile, S&P Global’s gauge was revised higher for October from the flash print, but nevertheless remained in contraction territory for a fourth month, at 47.8. The spread between the two indexes was the narrowest since June.
The new orders gauge slipped substantially in the ISM survey, and the employment index dipped into contraction territory. That’s potentially ominous. Recall that although October’s ADP jobs report was superficially robust, the breakdown showed hiring wasn’t broad based. In the services sector, information, finance, business services, as well as education & health all shed employees. 84,000 additions in trade and transportation, alongside 210,000 in leisure and hospitality compensated.
Of course, it’s difficult to discern the extent to which any hiring slowdowns are due to expectations for a cooler economy versus labor scarcity. This week’s JOLTS data plainly suggested workers are still in demand. That, despite ubiquitous reports of corporate hiring freezes and, in some cases, job cuts.
“It has become more challenging to maintain our level of service, due to increased demand, extended supplier lead times and the hyper-competitive employment market,” one of the ISM anecdotes read.
Also eye-catching from the ISM report: New export orders plunged 17.4 points from September to just 47.7. That was the largest monthly decline ever, outstripping a 15.6-point drop in January and a 15.5-point slump in November of 2008, following the low key collapse of a US investment bank, an event some market participants described as notable at the time. (Readers younger than, say, 28, may not catch the dry humor there.)
Similarly, S&P Global flagged a fifth straight decline in new business from abroad. The rate of contraction last month was the second-fastest since the pandemic, as global demand weakened and the strong dollar weighed. S&P Global said employment in the US services sector nearly stagnated.
“Service sector firms faced a challenging start to the final quarter of 2022, as a renewed contraction in new business dragged output down further,” Sian Jones, Senior Economist at S&P Global Market Intelligence, said Thursday. “Demand conditions were hampered by tighter financial conditions and elevated rates of inflation, leading to reports of postponements and the delayed placement of orders as customers assess their spending.”
Very much unlike the marked drop in ISM’s gauge of factory prices, the services sector price index rose for the first time since April. “Prices seem to continue increasing for commodities,” someone in real estate mused. Still, ISM said the services prices index “continues to indicate movement toward equilibrium.”
ISM’s Anthony Nieves summed it up, describing “challenges” for employers looking for qualified workers, even as the uncertain macro environment prompted others to “hold off” on filling open positions. Although some of the supply chain issues that bedeviled firms earlier this year have eased, “logistical issues persist.”
