MNI INTERVIEW: US Services Growth Still Largely Intact - ISM

The U.S. services sector in April held up well and the expansion is set to continue despite rising input costs, with a surge in AI-related activity offsetting weakness in other areas, Institute for Supply Management services chair Steve Miller told MNI.

"I'm not seeing any signals that say we're slowing down. This is the third month in a row where we've had nine of the 10 sub indexes in expansion territory," Miller said. The PMI "continued to show strength."

The ISM services index eased 0.4 percentage points in April to 53.6, largely meeting expectations. The composition of the report was mixed and it was the lowest reading since November, but still above the 2025 average of 51.7.

"With my view of a greater than 50% chance that we'll see moderate flow of oil through the Strait of Hormuz through the summer, I'm expecting us to be in the mid 50s, maybe 54, 55, 56" on the PMI, he said. "There is a significant risk that we're going to see a higher oil price than USD105 or USD110, unless the shepherding of vessels through the Strait of Hormuz works."

ELEVATED INFLATION

The energy price shock due to the war with Iran kept the prices index elevated at 70.7, the same as last month. That points to a further increase in inflation. (See: MNI INTERVIEW: Fed Is Firmly On Hold For Some Time - Sheets) 

"The only time we've seen 70s has been when we've seen high inflation," Miller said. "I don't know how we avoid it."

There was a a sharp drop in the new orders measure, by 7.1 points to 53.5 in April. It was the sixth largest monthly drop in the history of reporting the PMI.

Miller didn't express much concern about the drop in new orders, noting the level is back down to its 12-month average. "My inference into the data is that the drop is just related to back to normal ordering after people ordered ahead to try and beat fuel price and transportation cost increases from the increased oil levels."

He said the average monthly reading over the last 12 months is 53.9 and the February and March indexes were 58.6 and 60.6, way above the 12-month average. "It looks like we had some abnormal ordering behavior in February and March, and it's back to normal in April."

The employment index rebounded by 2.8 points in April to 48.0 after having dropped sharply in March. "It's the same story. We're at 48 in employment, versus a 48.6 for the 12-month average," Miller said. 

TWO-SPEED ECONOMY

Miller said the U.S. expansion is becoming increasingly bifurcated as demand related to the buildout of infrastructure for AI remains strong while other parts of the economy lag.

"It's two different economies in construction. It's housing and its data centers," Miller said. "Housing is depressed and in data centers it's difficult to keep up."