The Institute for Supply Management’s (ISM) non-manufacturing index fell 3.6 points to 56.1 in March. The headline print undershot consensus expectations, which called for the index to moderate to 58.0.
Delving into the details, three of the index’s four main subcomponents that make up the headline fell on the month. The declines were led by a hefty drop in business activity (-7.3 points to 57.4) and new orders (-6.2 points to 59.0), both of which have moved lower after reaching a post-recession peak in February. Supplier deliveries registered a smaller decline (-1.5 to 52.0).
Meanwhile, the pace of hiring picked up, with the employment subcomponent edging higher on the month (+0.7 to 55.9). While it remains firmly in expansionary territory, the subcomponent had declined in four of the last six months, leaving it at roughly the same level as it was a year ago.
Price pressures firmed up meaningfully in March. The prices paid subcomponent shot up 4.3 points to 58.7. Prices for many commodities, including diesel & gasoline, paper and steel strengthened in the month. Despite the gain, the index remains below its year ago level.
Trade-related components were mixed. Export orders declined by 2.5 points to 52.5, while import orders gained 3.0 points to 51.5, moving back into expansionary territory. It’s important to note that trade components are not seasonally adjusted, and thus the monthly moves should be interpreted with caution. Both subcomponents remain well below their year-ago levels.
Key Implications
After a solid gain in the prior month, the ISM non-manufacturing index came back to earth in March. Much of the payback was due to a reversal of the outsized gains seen in business activity and new orders in the prior month. Looking through choppy monthly numbers, it is unambiguous that service sector activity has moderated relative to elevated levels seen last year, which is also true of U.S. economic activity more broadly.
Importantly, the index still remains well in expansionary territory, suggesting that services side of the economy continues to hum along nicely, and hence March’s slowing is hardly something to be losing sleep over.
There were also several positive items in today’s report. In particular, the gain in the employment subcomponent is encouraging and increases the likelihood that hiring will bounce back in March following a lackluster payroll print in February. The prices paid subcomponent also rebounded in March, suggesting that disinflationary pressures have eased. This largely reflects higher energy prices, but also higher prices for other commodities, and should help to move the inflation needle higher in coming months.
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