U.S. service gauge falls more than expected as demand moderates
The U.S. service sector expanded in March at a much slower pace than projected on considerably weaker new orders growth and softer business activity.
The Institute for Supply Management’s index fell nearly four points to a three-month low of 51.2, data showed Wednesday. The figure was weaker than all but one forecast in a Bloomberg survey of economists, which had a median projection of 54.4.
While an index above 50 indicates expansion, the decline suggests companies and consumers are becoming more cautious. When paired with the latest ISM factory survey that showed a further deterioration, the services data may heighten concerns about the economic outlook as credit conditions tighten and interest rates remain high.
The group’s index of new orders at service providers dropped more than 10 points to a three-month low of 52.2. While still consistent with expansion, the scale of the drop suggests a significant slowing in the pace of bookings growth. The business activity measure, which mirrors the ISM’s factory production index, slipped to 55.4.
“There has been a pullback in the rate of growth for the services sector, attributed mainly to a cooling off in the new orders growth rate, an employment environment that varies by industry and continued improvements in capacity and logistics,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement.
The S&P 500 declined and Treasury yields fell after the report.
Meantime, inventories grew at the quickest pace in two years and order backlogs shrank at the fastest rate since May 2020, reinforcing concerns of slowing demand.
Export orders also contracted, and the group’s gauge of supplier deliveries dropped to its lowest level since 2009. While the export gauge is unadjusted for seasonal variations and can be volatile from month to month, the 18-point slump was the biggest on record.
The index for prices paid for inputs fell by more than 6 points to 59.5, the lowest level since July 2020 and suggesting a slowing in inflationary pressures.
The monthly decline was the steepest since 2017. Service-sector inflation has been a key concern for Federal Reserve officials, who worry a tight labor market risks keeping the rate of price growth elevated for longer.
The pace of hiring appeared to moderate in the month, though the group’s employment gauge indicated further increases in head count. Separate figures Wednesday from ADP Research Institute showed private payrolls increased by a less-than-expected 145,000 in March.
The monthly jobs report, which is produced by the Bureau of Labor Statistics, will be released on Friday. Economists forecast employers added nearly a quarter of a million jobs in March while the unemployment rate held at a historically low 3.6%.