The purchasing managers' index (PMI) from IHS Markit for the U.S. services sector, which accounts for a much larger share of the overall economy than manufacturing, fell to 53.3 in January. That is the lowest headline reading since April of last year but in line with expectations. More importantly, any reading above 50 implies overall activity expansion, and the January print is still well above the pre-election level. Further, new business expanded at a faster pace last month, and order backlogs rose at the strongest rate in almost three years.
All of that additional strain on capacity helps explain why job creation remains elevated. Inflation, though, continues to be a concern for service providers, as input costs increased at the fastest pace in nearly half a year in January. Surveyed managers attributed this to “higher raw material costs, especially fuel,” but many respondents also said that they have been able to pass greater cost burdens onto customers thanks to strengthening demand. Even more encouraging was the Institute for Supply Management’s (ISM’s) non-manufacturing index, which rose to 59.9 in January. That is significantly better than anticipated and the highest headline reading since August 2005. Measures of production, new orders, and employment all improved last month, and comments from surveyed managers were generally positive. One respondent even said that “executive management [is] excited about tax breaks for CapEx purchases in [the] new tax bill.”
Sources: Econoday, IHS Markit, ISMPost author: Charles Couch