ISM reports ongoing growth for services-based economy in February

While not reaching the high levels achieved in January, economic growth in the services sector, for the month of February, remained on a growth track for the ninth consecutive month, 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 55.5 (a reading of 50 or higher indicates growth is occurring) in February, which was off 3.4% compared to January’s 58.7 reading, which was the highest reading since July 2020’s 58.1.

February’s Services PMI is 0.9% above the 12-month average of 54.4, with January’s 58.7 remaining the highest over that period, with April 2020’s 41.6 marking the nadir over the same period. Services sector growth has seen gains in 131 of the last 133 months.

ISM reported that 17 of the 18 non-manufacturing sectors it tracks saw gains in February, including: Accommodation & Food Services; Wholesale Trade; Transportation & Warehousing; Construction; Arts, Entertainment & Recreation; Public Administration; Utilities; Health Care & Social Assistance; Retail Trade; Professional, Scientific & Technical Services; Finance & Insurance; Management of Companies & Support Services; Information; Agriculture, Forestry, Fishing & Hunting; Educational Services; Other Services; and Mining, with Real Estate, Rental & Leasing being the lone sector seeing contraction.

The report’s equally weighted subindexes that directly factor into the NMI were mostly down in February, including:

  • business activity/production down 4.4% to 55.5, growing, at a slower rate, for the ninth straight month, with 14 sectors reporting growth;
  • new orders fell 9.9%, to 51.9, also growing, at a slower rate, for the ninth straight month, with 11 services sectors growing;   
  • employment decreased 2.5%, to 52.7, growing, at a slower rate, for the second straight month, with 11 services sectors reporting growth; and
  • supplier deliveries, at 58.9 (a reading of 50 or higher indicates contraction), slowing at a faster rate for the 21st consecutive month

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

“COVID-19 restrictions continue to affect the number of students either applying to college, living on campus or finding alternative means of a valuable education,” said an educational services respondent. “As such, revenues have decreased while expenses increased.” And a management of companies and support services respondent said that his company has an overall positive outlook, with new COVID-19 cases trending down nationally and vaccine distribution coming online, with the caveat that possible changes to the regulatory environment for oil and gas is a looming negative influence.

In an interview, Tony Nieves, chair of the ISM’s Services Business Survey Committee, said that even with the sequential decline in the Services PMI, the economy is not cooling off by any stretch.

“Things are still growing but not at the same rate, with the pullback in the rate of growth,” he said. “Business activity and new orders are still growing month over month…if you look at where the levels were in January, they are strong but just not at the same rate of growth. Things have opened up a bit in the economy, and there is still room for growth. But we are still not at full operating capacity or really anywhere close to it. We will still be on this path of growth; it is just determining what that rate will be going forward. We are on the path of recovery, and it is not going to slow down by any stretch.”

Addressing employment, Nieves said the eventual expiration of COVID-19-related unemployment benefits, coupled with there being a labor pool out there, not being the applicable labor pool relevant to the services economy.

The reason for this, he explained, is that the types of people on the unskilled labor side not currently working won’t return to work in a meaningful way until the areas with low-skilled workers—in retail, fast food restaurants, and other sectors—get to full capacity, adding that as the economy opens up, the employment rate will increase in tandem.

Inventory outlook: February inventories increased 9.7%, to 58.9, which Nieves attributed to many variables, including: high import levels and port congestion; the Lunar New Year; a buildup of inventories before the holidays, and companies lowering inventories for fiscal purposes around year-end and the post-holiday burn-off of inventories; increased demand in January; production capacity output moving upstream, for both manufacturers and other service industries that are suppliers to other service industries.

“There was a burn-off of inventory and now there is this buildup of demand, so I think inventories will stay in the 50s range as well,” he said. “There also remains a shortage of containers, trucks, and trucking capacity, which is all contributing to slower deliveries, and that is why we will need to see this inventory built up as well.”

About the Author

Jeff Berman, Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman