Commentary Directory

ISM Services PMI: March 2024

Jacob Hess
April 03, 2024

The ISM Services PMI for March surprised in more ways than one after a strong reading from the Manufacturing PMI. The headline Services PMI index fell -1.2 pts to 51.4 which was below expectations of a small increase to 52.7. While this lengthened the current streak of growth in the service sector to 15 months, it is the lowest so far this year. For context, an index reading of this value is associated with annualized GDP growth of about 0.8%. This tracks lower than the current GDPNow forecast of 2.5% and suggests that service sector fundamentals are slightly weaker than previously thought. However, this is just one data point.

Most of the subcomponents index values were falling in March, but they didn't necessarily point to a contraction. The New Orders index fell -1.7 pts to 54.4 as there was a slight pick up in the percentage of firms reporting a decline in orders and a slight drop in the percentage reporting an increase in orders. Both Suppliers Deliveries and Inventories saw drops in March, down -3.5 pts to 45.4 and -1.5 pts to 45.6, respectively, suggesting that supply chains were continuing to normalizing and inventories were moving back into alignment with current activity. This includes services firms working through backlogs at a sharp rate in March. The Backlog of Orders index fell -5.5 pts to 44.8, moving back into a contraction after small expansions in January and February.

The subcomponent that got the most scrutiny was the Prices index which was another one of the subcomponents that fell, down -5.2 pts to 52.4. This was a downside surprise compared to the consensus that price pressures in the service sector would be maintained. Instead, the drop in the index pointed to the possibility that services inflation was easing quicker than expected. Indeed, this reading was the lowest since inflation began its run up in 2022. The index moved because there was a 7.0 ppts increase in the percentage of services firms reporting lower prices to 12.3%. The move in the Prices index caused a slight rethinking of the inflation outlook, but in reality, it shouldn't change too much. Surveys like this can be subject to month-to-month volatility, and more broadly, 13/15 industries still reported inflation.