Slowing Services Growth in the US: Impact on Earnings and the Economy

The latest Services ISM® Report On Business® reveals that the growth of the US services sector has slowed in March 2023, raising concerns for the US economy as services account for 77.6% of its GDP. This article discusses the potential negative impact of this trend on earnings and the economy.

Slowing Services Growth: A Closer Look

According to the March 2023 Services ISM® Report On Business®, the Services PMI® registered at 51.2%, a decrease of 3.9 percentage points from February's reading of 55.1%. The Business Activity Index registered at 55.4%, a decrease of 0.9 percentage points compared to February's reading. The New Orders Index, however, dropped significantly by 10.4 percentage points to 52.2%, indicating a cooling-off in the new orders growth rate.

The report also shows a slowdown in the Employment Index, which decreased by 2.7 percentage points to 51.3%. There is some good news, though. Thirteen industries reported growth in March, with the majority of respondents expressing a positive outlook on business conditions.

Breaking down the above data:

1. Business Activity: ISM's Business Activity Index registered 55.4%, with 14 industries reporting an increase in business activity for March.

2. Employment: ISM's Employment Index registered 51.3%, with 11 industries reporting an increase in employment for March.

3. Supplier Deliveries: The Supplier Deliveries Index registered 45.8%, down 1.8 percentage points from February, with three industries reporting slower deliveries in March.

4. Inventories: The Inventories Index registered 52.8%, with nine industries reporting an increase in inventories in March.

5. New Orders: ISM's New Orders Index registered 52.2%, with 12 industries reporting growth of new orders in March.

6. Prices: Prices paid by services organizations registered 59.5%, with 13 services industries reporting an increase in prices paid during March.

7. New Export Orders: The New Export Orders Index registered 43.7%, an 18-percentage point decrease from February, with four industries reporting an increase in new export orders in March.

8. Imports: The Imports Index contracted to 43.6%, down 9 percentage points from February, with four industries reporting an increase in imports for March.

9. Inventory Sentiment: The ISM Services Inventory Sentiment Index registered 57.9%, with 11 industries reporting sentiment that their inventories were too high in March.

The pullback in the rate of growth for the services sector is mainly attributed to the slowing of the new orders growth rate, the varying employment environment by industry, and continued improvements in capacity and logistics.

Federal Reserve Policy's Impact on Services Growth and Core Services Inflation

The Federal Reserve's policy of aggressively increasing interest rates and tightening their balance sheet is believed to be a factor affecting the growth of the services sector. The slowing growth in services may lead to reduced core services inflation, which is a significant area of concern for the US central bank.

Negative Impact on Earnings and the Economy

The slowing growth in the services sector can have adverse effects on earnings and the overall economy. With the services sector accounting for 77.6% of the US GDP, any slowdown in growth can have significant implications for the overall economy. Slower growth in the services sector can lead to lower corporate revenues, affecting earnings and profitability for businesses as well.

Moreover, the slowdown in the services sector may lead to reduced hiring or even layoffs in industries that are directly affected. This can increase unemployment levels, further affecting consumer spending and confidence. Additionally, a slowdown in the services sector can limit the government's tax revenues, potentially impacting public spending on infrastructure, education, and social welfare programs.

Closing thoughts

The March 2023 Services ISM® Report On Business® demonstrates a slowing growth rate in the US services sector, which is a concerning trend for the overall economy, given that services account for 77.6% of the US GDP.

The Federal Reserve's aggressive tightening policy is impacting services growth and, in turn, we may see some progress on core services inflation. This would be relief in a much needed area, although shelter inflation is likely to remain elevated for at least a couple more months due to lagging data and its impact on the measure.

The most important takeaway is this: a slowdown in another leading indicator may negatively affect earnings and the overall economy, with potential key impacts in areas such as hiring, consumer spending, and public spending that could become larger trends of weakening growth.