MNI INTERVIEW: US Services Growth Seen Fueled By Fed Cut - ISM

U.S. service sector growth will get a boost from expected Federal Reserve interest rate cuts starting this month, which should help counter fading demand from firms that had been stockpiling ahead of the implementation of new tariffs, Institute for Supply Management services chair Steve Miller told MNI Thursday.

"I think we're going to see with a rate cut, we'll see something in the 52 to 55 range," Miller said about the PMI in coming months. "It's not going to be huge numbers, but it's going to be continued strength. With a little bit further relaxation on the rate side, we'll see some additional growth."

The ISM composite increased 1.9ppt to 50.8 last month to the highest since February, above market expectations and the neutral threshold of 50. The composition of the report was strong, as the business activity index increased 2.4ppts to 55.0, new orders jumped 5.7ppts to 56.0, and employment edged up 0.1pt to 46.5. 

SUPPORT FOR CUTS

Miller said the data he is seeing generally and in the ISM survey "gives a lot of support to a cautious, stepwise reduction in the Fed rates. Our numbers are certainly supportive of, don't go too fast, but go." (See: MNI POLICY: Fed Takes Measured Approach To Post-September Cuts) 

In August, it appears that firms were stockpiling to beat tariffs, not to satisfy a sustained pickup in demand. The new orders subindex jumped 5.7ppts. 

"I was surprised at how much the new orders jumped up," Miller said. "I can't convincingly say that it'll be a sustained increase."

"All I can say is with the commentary that I got that it seemed about getting ahead of tariffs, getting ahead of price increases that are being agreed to as a result of tariffs and some of the holiday season activity," he added. 

EMPLOYMENT COOLING 

On employment, Miller expects the Bureau of Labor Statistics' employment report Friday to show continued cooling. 

"You're going to continue to see for at least a couple of months the weakness, because our numbers seem to be a month to two months ahead of what flows through and in BLS and ADP," Miller said.

"From my perspective, unless we see sustained new orders at a 55 kind of level for a few months, we're not going to see that backlog start to creep up, and that's not going to drive any additional employment needs," Miller said, adding that he is "not seeing a significant drop in employment, but just seeing weakness in hiring."

The August survey closed before the United States Court of Appeals ruling that the President cannot impose broad tariffs of unlimited duration using the International Emergency Economic Powers Act, Miller noted. 

"There wasn't any commentary about that at all in our survey," he said. "I don't think there is a lot of uncertainty there. This is just an administrative delay. It's not a change in direction."