U.S. services industry growth slowed in February due to a drop in employment, but new orders rose to a six-month high, indicating strength.
Despite job losses, services companies in the Institute for Supply Management (ISM) report on Tuesday were optimistic, but labor shortages remained a concern. The Federal Reserve was pleased to see no signs of inflation rising after a price spike at the start of the year.
Financial markets expect the U.S. central bank to decrease interest rates this year, but the timing is uncertain due to strong inflation, which is driven by services including housing, energy, finance, healthcare, and recreation.
"While easing price pressure and moderation in hiring tilt this report in a dovish direction, the Fed will want to see these developments translate to hard data on inflation and job growth," said Wells Fargo senior economist Tim Quinlan in Charlotte, North Carolina.
The ISM reported a 52.6 non-manufacturing PMI last month, down from 53.4 in January. Above 50 signifies expansion in the services industry, which makes up two-thirds of the economy. Reuters economists expected the index to stay at 53.0. The PMI showed steady economic growth despite 525 basis points of Fed rate hikes since March 2022. Construction, retail commerce, public administration, utilities, and wholesale trade were among 14 services businesses that grew last month.
Production increased, with business activity reaching a five-month high of 57.2 from 55.8 in January. Retailers reported "business is good," "inflation is under control and trending downward." Construction firms said "materials levels have returned to pre-coronavirus pandemic levels, and the outlook for 2024 is strong."
Professional, scientific, and technical services providers reported "experiencing stabilization from external economic influences," while accommodation and food services reported "Red Sea issues have not yet impacted our purchasing conditions," referring to shipping attacks.
Last month, services inflation slowed. A business input price index declined to 58.6 from 64.0 in January, an 11-month high. That reinforces most economists' belief that January's inflation spike was caused by early-year price spikes, which were unlikely to repeat in February. "The underlying trend suggests that services inflation will remain on a downward trend in the first half, with some risk that it may not cool as quickly as Fed officials would like," said Nationwide financial market economist Oren Klachkin.
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