December services economy activity ends 2022 with some declines, reports ISM

Following a solid November performance, December services economy output finished 2022 with a decline, according to the new edition of the Services ISM Report on Business, which was issued late last week by theInstitute for Supply Management (ISM).

The Services PMI—at 49.6 a (a reading of 50 or higher signals growth)—fell 6.9% off of December’s 56.5, snapping a 30-month run of growth, coupled with the PMI contracting for two consecutive months for the first time going back to April and May 2020, in the early months of the pandemic. What’s more, prior to December’s PMI contraction, services growth had been intact for 152 of the last 154 months through November.

The December Services PMI is 6.6% below the 12-month average of 56.2, with January 2022’s 59.9 and December’s 49.6, marking the high and low, respectively, for that period, with December also marking the lowest Services PMI reading going back to May 2020’s 45.2.

ISM reports that 11 of the service sectors it tracks saw gains in December, including: Retail Trade; Health Care & Social Assistance; Utilities; Public Administration; Arts, Entertainment & Recreation; Mining; Accommodation & Food Services; Transportation & Warehousing; Management of Companies & Support Services; Professional, Scientific & Technical Services; and Finance & Insurance. The six industries reporting declines were: Real Estate, Rental & Leasing; Wholesale Trade; Other Services; Information; Construction; and Educational Services.

The report’s equally weighted subindexes that directly factor into the NMI were down, from November to December, including:

• Business activity/production, at 54.7, fell 10.0%, growing, at a slower rate, for the 31st consecutive month with 11 sectors reporting growth;
• New orders, at 45.2, fell 10.8%, contracting, after 30 consecutive months of growth, going back to May 2020, with five sectors growing;
• Employment, at 49.8, decreased 1.7%, contracting after growing in November, with five sectors reporting growth;
• Backlog of orders, at 51.5, fell 0.3%, growing, at a slower rate, for the 24th consecutive month, with six sectors reporting an increase;
• Supplier deliveries, at 48.5 (a reading above 50 indicates slower deliveries), were down 5.3% compared to December, slowing, at a slower rate, for the 42nd consecutive month, with nine services sectors reporting slower deliveries; and
• Prices, at 67.6, falling 2.8%, increasing, at a slower rate, for the 67th consecutive month, with 15 services sectors reporting growth

Comments from ISM member respondents included in the report highlighted various issues being seen in the services sector.

An agriculture, forestry, fishing & hunting respondent said that business is slower than usual, adding that seems to be a three- or four-month trend, with the expectation it will pick up in January. And an educational services respondent said her company is dealing with inflation, increased labor costs, longer lead times, and a sector-wide challenge in retaining employees.

主席托尼Nieves ISM的服务业务Survey Committee, said in an interview, that December’s declines are not a harbinger for a downward stretch of services economy activity.

“We know one month does not make a trend,” he said. “Business activity, at 54.7, is still decent; we are measuring directional change month-over-month. I believe this is an adjustment, because we know, in the past, that there was a tough time getting product through the supply chain and now there is improved logistics [operations] and improved capacity. Which has adjusted things, for companies, like adjusting order quantities and order frequencies, because everything was adjusted so hard and fast in the past. Look at supplier deliveries, at 48.5. If we still had faster or slower deliveries, that would have impacted the composite, and we would have maybe been in the low 50s.”

Addressing the employment reading, at 49.8, Nieves said it represents a dichotomy, in that there are certain technology companies making layoffs, coupled with economic uncertainty. He also noted that online distribution [e-commerce] has decreased, as well as other sectors still struggling to find the right workers and having challenges backfilling positions.

On the prices side, with inflation seeing some very slight declines, Nieves said it is different for services than it is for manufacturing, which has seen raw materials prices decline across various manufacturing markets.

“In the [services] sector, finished goods and tangible goods are one component, but there is also the labor,” he said. “And the labor is intensive in this sector, in terms of employment, costs, and wage pressure.”

With demand and pricing somewhat down, Nieves said it remains to be seen if that becomes a sustained trend that could lead to a recession.

“There is potential for a recession, but right now, with good employment numbers, employment is a big factor in determining if there is a recession, as well as inflation and GDP contraction, to really put the economy into recession territory.”