The ISM services index eased 2.4 percentage points (ppts) to 59.9 in January (from 62.3 reported in December). This was a slightly better reading than 59.5 expected by the median consensus estimate.
Demand sub-indexes continued to grow, but at a slower pace. The business activity sub-index declined by 8.4 ppts to 59.9 from 68.3, while new orders remained above 60, easing only 0.4 ppts to 61.7 from 62.1 reported in December.
The supply-side indicators saw mixed fortunes. Delivery times worsened, with the supplier deliveries sub-index increasing by 1.8 ppts to 65.7, still the index is 10 points below its recent high of 75.7 in November. Meanwhile, the backlog of orders sub-index eased by 4.9 ppts to 57.4 from 62.3 in December (likely due to slower demand).
Inventories were up by 2.7 points to 49.4, while inventory sentiment increased markedly to 47.5 (+9.2 ppts) – still in the contractionary territory, suggesting that inventories remain too low for the level of demand.
The new export orders sub-index plunged to contraction, collapsing by 15.6 ppts to 45.9. Imports remained in expansion dropping to 51.1 (- 4.4 ppts).
The employment sub-component slowed for the second month, but remained expansionary with a reading of 52.3, down from 54.7 in December.
The prices paid component moved lower to 82.3 from its highest level of 83.9 in December.
Fifteen industries expanded in January. The three industries reporting contraction are Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; and Information.
Key Implications
The services sector started the new year on a weaker footing, largely due to Omicron. Based on the sentiment expressed in today’s report, firms’ remain cautiously optimistic about demand despite “challenging operating conditions”.
Comments on employment paint a colorful picture: “Omicron is keeping between 20 and 25 percent of our workforce out daily”. We’ll have a better idea about how Omicron affected January employment numbers tomorrow. Stay tuned.
Despite these challenges, the trend path remains upward, suggesting that the sector will bounce back once the threat of Omicron fades. The sector hasn’t fully profited from reopening and should continue to benefit from consumers’ directing more of their spending to services.
