August Services PMI trends down but still showing growth, reports ISM

Even though it did not surpass July’s all-time high, services economy growth, for the month of August, had another strong month, according to data in the most recent edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 61.7 (a reading of 50 or higher indicates growth is occurring), down 2.4% compared to July’s all-time high reading, at 64.1, while growing for the 15th consecutive month, with services sector growth intact in 137 of the last 139 months.

The August Services PMI reading is 1.8% above the 12-month average of 59.9, with July representing the highest reading for that period and February’s 55.3 representing the lowest reading.

ISM reported that 17 of the 18 services sectors it tracks saw gains in August, including: Accommodation & Food Services; Retail Trade; Construction; Educational Services; Information; Mining; Other Services; Utilities; Public Administration; Transportation & Warehousing; Health Care & Social Assistance; Wholesale Trade; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Real Estate, Rental & Leasing; and Professional, Scientific & Technical Services. The only industry to report a decrease was Arts, Entertainment & Recreation.

The report’s equally weighted subindexes that directly factor into the NMI saw decreases in August, including:

• business activity/production decreased 6.9%, to 60.1, growing, at a slower rate, for the 15th month in a row, with 15 service sectors reporting growth;  
• new orders fell 0.5%, to 63.2, growing, at a slower rate, for the 15th month in a row, with 13 service sectors reporting growth;
• employment fell 0.1%, to 53.7, growing, at a slower rate, for the second straight month, which was preceded by five straight months of growth, with 9 services sectors reporting growth; and
• supplier deliveries, at 69.6 (a reading of 50 or higher indicates contraction), slowing, at a slower rate, for the 27th consecutive month, with 17 services sectors reporting growth

Comments from ISM member respondents included in the report highlighted a confluence of issues impacting the services sector, including supply chain challenges and lack of worker availability, among others.

“Supply chain disruptions — including manufacturing-labor shortages, logistics delays and lack of material to make products — are significantly disrupting our business,” observed an Accommodation & Food Services respondent.

Tony Nieves, chair of the ISM’s Services Business Survey Committee, said in an interview that even with the Services PMI seeing a decline, August was solid over all.

“It is still a great report,” he said. “The numbers are really strong, even with the pullback. As an example, prices fell 6.9, to 75.4, well above 50 benchmark for growth.”

As for what the main thesis of this report is, Nieves pointed to ongoing strong demand that is lacking the supply to meet it, and also a lack of needed capacity to meet the full capabilities at the moment.

“That may not be a bad thing, because it is helping to channel things off, in the event of a strong surge,” he said. “If we did not have the current state things are in, we might have had a big surge and then a real tapering and leveling off. That is why this growth is sustainable, because we just don’t have the capacity to keep up with demand.”

When asked about the impact of the Delta Variant and its impact on the services sector, Nieves noted that when it comes to Covid, there is still a feeling of cautiousness of people returning to customer-facing jobs.

And when taking into account federal stimulus funding and unemployment, and some of the lower-paying customer-facing jobs, there is reluctance in going back to work by many people, he said.

“We are seeing that in certain industries in this sector, as well as today’s jobs report, too,” he said. “The drop-off in jobs in sectors like food service and leisure are due to people finding other types of work as well. It is because they have options.”

Looking at the services sector on a year-to-date basis, Nieves said that conditions are well ahead of expectations.

“More of a pullback was expected in August, coming off of two all-time high readings in a short period of time,” he said. “We did not expect the Services PMI to come in above 60 again. It is due largely to the ongoing capacity issues.”