ISM Services Dips But PMI Confirms Soaring Cost Inflation

On the heels of US Manufacturing's stagflationary signals (albeit mixed ISM/PMI headline prints), the US Services sector was also mixed (ISM dipped as PMI spiked) but the latter confirmed signs of significant price inflation (largest monthly rise in aggregate prices since September 2014).

As a reminder, Manufacturing was extremely exuberant according to ISM and disappointing according to Markit's PMI.

In the case of the Services economy, Markit's PMI jumped to its highest level since Nov 2015 but ISM dipped from record highs in January (but was slightly better than expected)...

ISM Breakdown

  • Business activity rose to 62.8 vs 59.8 prior month
  • New orders rose to 64.8 vs 62.7
  • Employment fell to 55.0 vs 61.6
  • Supplier deliveries unchanged at 55.5 vs 55.5
  • Inventory change rose to 53.5 vs 49.0
  • Prices paid fell to 61.0 vs 61.9
  • Backlog of orders rose to 56.0 vs 51
  • New export orders rose to 59.5 vs 58.0
  • Imports fell to 50.0 vs 54.0

While ISM shows a modest drop in prices paid, Markit suggests that on the prices front, cost burdens faced by service providers continued to rise in February. The rate of input price inflation accelerated to the fastest since June 2015. Where higher input costs were reported, panellists commonly linked this to higher fuel and raw material prices. Meanwhile, amid larger cost burdens and greater client demand, average charges also rose further as firms protected margins. Moreover, the pace of inflation quickened to the sharpest for five months.

And ISM survey respondents were anxious:

"Lumber-related costs continue to increase as supply is also starting to become a problem. The market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning."

"Slight increase in activity; beginning to see some higher cost for goods and services."

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“A surge in service sector activity comes as welcome news after a disappointing couple of months, especially is it was accompanied by further robust manufacturing growth in February.

“With growth of new orders across the two sectors collectively growing at the fastest rate for three years, March could also prove to be a good month for business activity, rounding off a solid opening quarter or the year.

Capacity is clearly being strained by the upturn in demand, as indicated by the largest build-up of uncompleted orders for nearly three years and reports of increasingly stretched supply chains.

“Encouragingly, business optimism about the year ahead has risen to one of the highest seen over the past three years, suggesting firms will remain in expansion mode to take advantage of the upturn. Hiring and business investment should therefore continue to rise in coming months.

“The concern is that prices continue to rise as demand outstrips supply. Average prices charged for goods and services showed the largest monthly rise since September 2014, which is likely to feed through to higher consumer price inflation.”

In summary, so far, the two PMI surveys point to the economy expanding at a steady 2.5% annualised rate in the first quarter.