Markets needed an offset on Wednesday.
According to ADP, the annual rate of pay growth for Americans switching jobs in March was a scorching 10%, nearly double the rate for so-called “job stayers.”
Although no one trades on ADP’s pay growth figures (it’s a relatively new series, introduced alongside a methodological change in 2022), the read-through was potentially concerning: The hotter wage growth runs, the higher the risk of a wage-price spiral, particularly in the services sector.
Mercifully in that context, the prices paid index in the ISM services release for March printed a four-year low at 53.4.
March’s five-point decrease was the second consecutive large decline, and should at least allay the market’s worst fears regarding rekindled inflation in the sprawling US services sector.
At 51.4, the headline ISM print counted as a miss. Consensus wanted 52.8. Although the new orders gauge slipped, the activity index was steady at 57.4. The employment measure remained in contraction territory, at 48.5.
“The decrease in the rate of growth in March and the decline in the composite index is a result of slower new orders growth, faster supplier deliveries and a contraction in employment,” ISM’s Anthony Nieves said.
Meanwhile, the final read on S&P Global’s services sector gauge for the US economy in March was 51.7, down from February but the 14th straight expansionary print nevertheless. Both measures of US services activity have been in expansion territory since February of 2023.
Recall that ISM manufacturing moved above the 50 demarcation line in March’s release for the first time since September of 2022. The read-through from March’s ISM updates, then, is that factory activity in the US is catching up to the services sector, which is gearing down ever-so-modestly.
Although markets were inclined to key on the ISM prices undershoot, it’s worth noting that the color which accompanied the S&P Global release was anything but sanguine when it comes to inflation risk. Specifically, the report flagged “sharp” increases for both input and output prices in March, “often as a result of rising wages.”
Chris Williamson, S&P Global’s chief business economist, was constructive on the growth outlook, but cautious on inflation. “The sustained upturn is being accompanied by renewed upward price pressures, with wage growth in particular driving costs higher,” he said Wednesday, adding that “both manufacturers and services providers [are] seeing intensifying cost and selling price inflation rates, which is likely to feed through to higher consumer price inflation in the near-term.”
