US Services Index Shrinks as Activity Gauge Hits Four-Year Low

(Bloomberg) — The US services sector unexpectedly contracted in April for the first time since 2022 as a gauge of business activity slumped to a four-year low and a measure of input costs rose.

The Institute for Supply Management’s composite gauge of services fell 2 points to 49.4, the lowest level since December 2022. Readings below 50 indicate contraction, and the April figure was lower than all estimates in a Bloomberg survey of economists.

The business activity index — which parallels ISM’s factory output gauge — slumped 6.5 points in April to 50.9. That’s the lowest level since May 2020, when the economy was reeling from pandemic-related shutdowns.

US Services Index Contracts as Business Activity Gauge Falls | Measure of prices paid for materials and services hits three-month high

The measure had been steadily picking up over the past six months. If weaker readings persist in coming months, it could raise concerns about a broader slowdown in economic growth because the service sector is the largest part of the economy.

“Survey respondents indicated that overall business is generally slowing, with rates varying by company and industry,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “The majority of respondents indicate that inflation and geopolitical issues remain concerns.”

Twelve industries reported growth last month, led by accommodation and food services. Six indicated a decrease in activity.

The group’s gauge of services employment contracted for a third month. The data follow government figures on Friday that showed the slowest US payrolls growth in six months. While labor demand is moderating, the reports likely don’t indicate “an unexpected weakening” that Federal Reserve Powell said would warrant a policy response.

What Bloomberg Economics Says…

“April’s sharp slowdown in services activity indicates monetary policy continues to weigh on the economy, even as firms struggle with higher input costs. Businesses noted ‘hiring freezes’ and ‘challenges with inflationary pressure through labor and service costs.”’

— Estelle Ou, economist

For the full note, click here

At the same time on the inflation side, the index of prices paid for materials and services increased to a three-month high of 59.2. The pickup is similar to the ISM gauge of manufacturers’ input costs, which climbed to the highest level since June 2022.

A gauge of new orders placed with service providers — a proxy of future demand — fell for a second month to the lowest level since the end of 2022.

Select ISM Industry Comments

“Although it varies by global region, we’re starting to see market softening in terms of price and lead time stability. That bidders are providing reasonable bid validities is an indication that much of the supply chain is coming into supply and demand equilibrium. Electrical equipment remains the outlier.” — Construction

“Inflation is raising our unit cost on products and services when compared to last year’s expenditures.” — Public Administration

“Continue to be challenged with inflationary pressure through labor and service cost increases, but we are working hard at finding utilization savings to offset where possible.” — Health Care & Social Assistance

“Business remains soft.” — Information

“We are still experiencing supply chain challenges with increased costs of raw materials, particularly chemicals and their containers, as well as higher U.S. and overseas freight transportation costs. A containers shortage has increased costs and slowed down the supply chain.” — Management of Companies

“Steady demand has been favorable during this traditionally slower season. Pricing is stable and the supply chain is strong. Employee recruitment and retention has been a challenge in some areas; however, the situation isn’t critical.” — Retail Trade

“The overall market has definitely slowed down. Our business is up year over year and month over month; based on our advanced analytics, we know that growth is coming from new customers.” — Wholesale Trade

Meanwhile, an index of inventories at service providers increased 8.1 points to a five-month high of 53.7. A guage of inventory sentiment reached the highest level since July 2017, indicating companies see stockpiles as too high.

A sustained build in inventories would risk tempering production at manufacturers in coming months.

–With assistance from Kristy Scheuble.

(Adds ISM industry comments, graphic)

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