The ISM services index rose 1.8 percentage points (ppts) to 58.3 in March (from 56.5 reported in February). This was just a notch lower than 58.4 expected by the median consensus estimate.
Demand sub-indexes showed signs of recovery from February’s slump. The business activity sub-index was up only marginally by 0.4 ppts to 55.5 from 55.1, while new orders moved back up to 60s, growing by 4.0 ppts to 60.1 from 56.1 reported in February.
The new exports index continued to recover from the contractionary territory for second month in a row, reaching 61.0 (+8.0 ppts). In contrast, the imports index moved back into contraction for the first time in six months losing 6.7 ppts with a reading of 45.0 in March.
Inventories were up by 0.9 points to 51.7, but inventory sentiment returned to contraction, dropping by 15.1 ppts to 40.2 suggesting that inventories remain too low for the level of demand.
Supply-side indicators were mixed in March. Delivery times improved with the supplier deliveries sub-index declining by 2.8 ppts to 63.4. The backlog of orders sub-index rose marginally by 0.3 ppts to 64.5.
The employment sub-component moved out of contractionary territory, rising 5.5 ppts from 48.5 in February to 54.0.
The prices paid component continued its ascent, reaching 83.8 from 83.1 in February, just one point shy of the highest reading of 83.9 reported in December. All 18 industries reported an increase in prices paid.
Seventeen industries expanded in March. The only industry reporting a contraction in March is Agriculture, Forestry, Fishing & Hunting.
Key Implications
The services sector showed signs of acceleration in March, shaking off some of the winter weakness caused by Omicron. The acceleration in demand is supported by improving inventories, which should make it easier for firms to support future growth. Furthermore, the recovery in the employment sub-index is encouraging as it may help ease supply-side pressures in a sector that is more labor intensive.
Still, the report is full of contrasts. Supply chain easing is a welcome sign but may not be enough to bring much relief on inflation. Indeed, there are no signs of normalization in prices as the Russia – Ukraine war continues to shock global commodity prices, while the recent lockdown of Shanghai may continue to make sourcing of products even more pricey and difficult. The risk is that rising prices may force companies to take “a cautious approach to planned capital expenditures.”
Despite these challenges, we maintain an optimistic view on the sector as it hasn’t fully profited from reopening, and should continue to benefit from consumers’ directing more of their spending to services.
