MNI INTERVIEW: Seasonal Demand Boost To Services Will Fade-ISM

The fastest gain in U.S. service sector activity in eight months in October was due to seasonal increases that will fade back to a modest growth pace over time, Institute for Supply Management services chair Steve Miller told MNI Tuesday.

"Since we're in the same place we were two months ago, before the government shut down, I'd say it's heavily seasonality impacted," Miller said. 

"The only ones that were talking about growth were talking about seasonality. It was healthcare, not the kind of seasonality you want, increases in flu and cold and that type of treatment, and then increase in retail and seeing the typical retail bump this time of year, both from wholesale, retail and transportation."

The ISM composite increased 2.4ppts to 52.4 last month, above market expectations. The business activity index jumped 4.4ppts to 54.3, and new orders surged 5.8ppts to 56.2. The prices subindex increased 0.6ppt to 70.0, the highest in three years. 

"I expected to see something more in line with what expectations were, something slightly over 50 with the holiday period coming in, but the new orders and business activity looked really strong and consumer oriented, Miller said 

DEMAND STABILIZING

October's PMI of 52.4 is likely the high end of the range for expected performance in the near term, he said. The demand environment appears to be stabilizing, based upon the commentary ISM has received, also pointing to a pickup in business activity and new orders.

"It's certainly the high end of the last eight months," he said. "What we've seen is a three-year decline in the trailing 12 months. There isn't anything yet that I've seen that says, 'Oh, here's an injection that's going to make our growth rate faster.' Everything is a negative pressure point -- the tariffs, the government shutdown."

"And then coming out of the Q4 seasonal improvements that we see in wholesale and retail, once we get to January and February, we could be between 50 and 53."

The supply side is still struggling. "The supplier delivery time is still in the slower range, but it's not getting slower faster," Miller said. 

"One of my concerns a couple months ago was, are we going to be able to keep up with demand when we start seeing those periodic spikes in ordering? And it looks like we are. Backlog is going down, employment is still in slight contraction, but supply chain performance seems like it's stable," the ISM chief said. 

Still, despite a truce with China on trade, impacts are evident in ISM data. The imports index number "took a real hit" declining by 5.5pts to 43.7. "We're seeing that turmoil in people finding other solutions or drawing down their inventories," Miller said. 

LACK OF CONFIDENCE

The continued contraction in the employment index at 48.2 shows a lack of confidence, but not pessimism, in the continued strength of the economy. Miller said services employment continues to represent a slow-hire, slow-fire environment. "There's nothing dramatic."