Services economy sets new records in March, ISM reports

Following the strong readings of its manufacturing counterpart, economic growth in the services sector, for the month of March, was very strong, according to the Institute for Supply Management’s (ISM) Services ISM Report on Business, which was issued today.

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—came in at 63.7 (a reading of 50 or higher indicates growth is occurring) in March, an 8.4% increase over February’s 55.3. This reading represents the tenth consecutive month of services sector growth, at a faster rate, as well as its highest monthly reading going back to October 2018’s 60.9. Services sector growth has seen gains in 132 of the last 134 months.

ISM reported that all of the 18 sectors it tracks saw gains in March, including: Arts, Entertainment & Recreation; Wholesale Trade; Mining; Management of Companies & Support Services; Construction; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Real Estate, Rental & Leasing; Transportation & Warehousing; Public Administration; Finance & Insurance; Utilities; Health Care & Social Assistance; Professional, Scientific & Technical Services; Information; Retail Trade; Educational Services; and Other Services.

The report’s equally weighted subindexes that directly factor into the NMI saw gains in March, including:

-business activity/production increased 13.9%, to 69.4, for its highest reading ever since ISM started collecting this data in 1997, and growing, at a faster rate, for the tenth straight month, with 17 sectors reporting growth;
-new orders increased 15.3%, to 67.2, to a new all-time high,  growing, at a faster rate, for the tenth straight month, with 17 services sectors growing;  
-employment increased 4.5%, to 57.2, growing, at a faster rate, for the third straight month, with ten services sectors reporting growth; and
-supplier deliveries, at 61 (a reading of 50 or higher indicates contraction), slowing at a faster rate for the 22nd consecutive month

Comments in the report submitted by ISM member respondents again reflected concurrent themes of business-related issues and the ongoing COVID-19 pandemic.

A Professional, Scientific & Technical Services respondent pointed to higher levels of demand related to additional business reopening, and increased activity related to vaccination distribution. And an Accommodation & Food Services respondent observed that Logistics delays and uncertainty are creating significant problems with suppliers and inventories, as well as cost concerns regarding inflated pricing due to logistics and shortages.

In an interview, Tony Nieves, chair of the ISM’s Services Business Survey Committee, said March’s strong gains are directly related to a few different factors, including COVID-19 vaccine distribution, pent-up consumer demand, and certain municipalities moving into different tier levels related to lifting pandemic-related disruptions, with more businesses re-opening.

“We have had this pent-up demand and build up, as we measure change month-over-month,” he said. “I don’t anticipate that things will stay on this fast pace. We will see some big growth increases, but this was like the big push and it will kind of wane, as we move through the months further down the road. I still do expect growth. There are still some industries at 50% capacity of where they could be. I would estimate that about three-quarters of the growth we are seeing right now will be spread out over the next several months.”

And that measured pace of growth could go a long way in preventing the economy from overheating, according to Nieves.

Looking ahead, Nieves said that while there is a feeling of cautious optimism regarding the services sector, concern regarding variants of COVID-19 remains intact.

“As long as we don’t see a major increase in cases and hospitalizations, and things don’t trends up in that regard, I think we will stay on our current path,” he said. “The growth may not be as dramatically strong as we have seen, like in March, but it will continue.”

That sentiment is in line with the ISM’s most recent Seminannual Report, which calls for the second half of 2021 to see more growth than the first half of the year, with revenues expected to be higher, for that period, too.

“There will be a leveling off, I am sure, in the next few months,” he said. “Sectors like dining, for example, will continue to grow and help to contribute to that growth,” he said.