Economic services activity begins 2021 with growth, reports ISM

Economic growth in the services sector began 2021 where 2020 left off, with growth intact for the eighth consecutive month. That was the main takeaway from the Institute for Supply Management’s (ISM) Services ISM Report on Business, which was issued today.

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 58.7 (a reading of 50 or higher indicates growth is occurring)—marking a 1.0% gain over December.

This represents the highest Services PMI reading over the last 12 months and is 4.2% above the 12-month average of 54.5, topping the previous 12-month high of 58.1 reached in July 2020, with April 2020’s 41.6 marking the nadir over the same period. Services sector growth has seen gains in 130 of the last 132 months.

ISM reported that 14 of the 18 non-manufacturing sectors it tracks saw gains in January, including: Real Estate, Rental & Leasing; Construction; Wholesale Trade; Finance & Insurance; Transportation & Warehousing; Health Care & Social Assistance; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Other Services; Mining; Professional, Scientific & Technical Services; Public Administration; and Information. The four industries reporting contraction in January were: Arts, Entertainment & Recreation; Educational Services; Retail Trade; and Utilities.

The report’s equally weighted subindexes that directly factor into the NMI were somewhat mixed in January, including:

• business activity/production down 0.6%, to 59.9, growing, at a slower rate, for the eighth straight month, with 10 sectors reporting growth;
• new orders were up 3.2%, to 61.8, growing at a faster rate, for the eighth straight month, with eight services sectors growing;
• employment increased 6.5%, to 55.2, with eight services sectors reporting growth; and
• supplier deliveries, at 57.8 (a reading of 50 or higher indicates contraction), slowing at a slower rate for the 20th consecutive month

Comments in the report submitted by ISM member respondents again reflected concurrent themes of business concerns and ongoing concern over the ongoing COVID-19 pandemic.

“Many of our restaurant locations remain completely shut down to on-site dining. We remain optimistic about business trends beyond April/May 2021. [We] have a very challenging few months to go,” said an Accommodation & Food Services respondent.  And an Other Services respondent noted that overall, everything continues to be more optimistic, but his company is still seeing impacts from suppliers that are being affected by limiting staff due to COVID-19 restrictions.

In an interview, Tony Nieves, chair of the ISM’s Services Business Survey Committee, said that while the current level of output is not at pre-pandemic levels, month-to-month growth remains intact.

“Things seem to be on the right path here,” he said. “I think the only potential headwinds might be the rollout of the COVID-19 vaccine, how fast it can be expedited, as well as the variants of the virus mutating in other parts of the world, derailing the path of recovery. Last year, we were wondering what was going to derail the economy, in terms of something geopolitical or catastrophic, and it turned out to be catastrophic. Now, it is anything that impedes the rollout of the vaccine. Right now, everything seems to be coming together nicely, and 2021 looks positive, with the second half looking better than the first half. It seems like we are on that track.”

Addressing the ongoing strong growth path for new orders, Nieves explained that he expects continued growth until that point in time when either everything gets opened up, due not to the activity level, but rather the availability of services opening up to pre-pandemic levels, at which point new order levels may start to come down. Another prospect cited by Nieves could be further shutdowns, which could, in turn, cause new order levels to diminish.

As for employment, which had another strong month, it is more labor-intensive than manufacturing, with more customer-facing positions as well.

“The key thing is that the numbers in the report are reflecting better than the recently-issued employment report from the federal government,” he said. “The impediment to employment growth is something we were experiencing pre-pandemic, an available labor pool…in terms of the number of people that are sitting on the bench and their applications into jobs that are out there. We are seeing a shortage in skilled labor, certainly in the construction arena. That is also the case with trucking, too, and it is being highlighted with a shortage of truckers and trucks, so there are some logistics issues right now.”

Looking at supplier deliveries, which slowed down again in January, Nieves said that some of that slowing is tied to port congestion, a major factor in the slowing down of the supply chain.

Nieves put that into perspective by noting how whenever someone makes an online order for something the product origin is from outside the U.S., which is for a majority of e-commerce goods, it always comes with the caveat that because of pandemic, there will be slower deliveries.