Summary
- In the ISM survey, business comments were generally optimistic, with labor shortages a constraint for some.
- The Federal Reserve is watching for signs of inflation, particularly service area inflation.
- The PMI indicates economic expansion despite interest rate hikes from the Federal Reserve.
- Increased orders were received by services businesses with production levels accelerating.
- Services inflation slowed, contributing to an overall downward inflation trend in the first half of the year.
- The employment level in the service sector has declined due to labor shortages and layoffs.
Services Businesses and Inflation
While employment is weak, businesses in the ISM survey gave generally positive comments, indicating that labor shortages remained a limitation for some. There were no indications that inflation was rising following a price increase at the beginning of the year. This is seen as positive by Federal Reserve officials.
Financial Market Outlook
The uncertain timing of the Federal Reserve’s expected interest rate cut is due to persistent inflation, with price pressures predominantly coming from services like housing, utilities, finance, healthcare, and recreation. The easing of price pressure and moderation in hiring steer towards a dovish Fed direction, but it remains to be seen how this will reflect in the inflation and job growth data.
Economic Expansion
The PMI reflects ongoing economic growth, despite several interest rate increases by the Federal Reserve since March 2022. Fourteen service industries, including construction, retail trade, public administration, utilities, and wholesale trade, reported growth in the previous month.
Inflation Trends
Services inflation decelerated last month. A measure of businesses’ input costs dropped from an 11-month high in January, supporting the view of most economists that the January inflation rise was driven by yearly price increases that likely won’t be repeated in February. This trend leads us to conclude that services inflation is likely to continue on a downward trend for the first half of the year.
Deliveries and Employment
The supplier deliveries measure decreased, indicating a faster delivery pace. This drop contributed to the fall in the services PMI. The ISM survey revealed decreased service sector employment, likely affected by worker shortages and job cuts.
Labor Demand
Various businesses reported labor shortages and recruitment issues, with some planning to bring in new employees in the spring. A decline in factory employment may suggest a slowdown in job growth. However, ISM services and manufacturing employment indications have not been consistent in predicting nonfarm payrolls employment, indicating a possible cooling of the labor market.
