Service PMI: Still in Growth Territory, but Only Barely So

The purchasing managers’ index for the service sector fell 2.7 index points in March to 50.8, a reading in the low portion of the range from the past two years. This range is far lighter than the robust readings in 2021 and 2022, and it is shy of the pre-pandemic norm as well. While the 50+ level of the index continued to suggest growth in the service sector, it offered little hope for a strong performance.

The employment component accounted for much of the softness in the headline index, as this measure tumbled 7.7 index points to 46.2. The month-to-month decline was the sharpest since the pandemic, and the level of the index was second lowest since the early stages of the current expansion. The sharp retreat is surprising in light of a rally in the prior five months that pushed the employment index to a three-year high. Purchasing managers have perhaps become cautious on the hiring front because of uncertainty associated with the policy plans of the Trump Administration. An easing in order flows also may have influenced employment plans. The new orders component has declined in four of the past six months, and it advanced only marginally in the other two months. The level of the orders index in March was barely in growth territory at 50.4.

Inflation is on the minds of many business executives and consumers, and concern was evident in the price index, which eased a bit in March but remained above 60 for the fourth consecutive month. The level of the index is not alarming (readings above 70 are not uncommon, and observations above 80 have occurred at times). Still, recent results suggest that purchasing managers see upside risks on inflation.

The recent performance of the service PMI has not been impressive, but it has been stronger than its manufacturing counterpart in the past two-plus years. The manufacturing index has languished below the critical value of 50 since late 2022, and it has trailed the service index by an average of four index points over this span. Moderate readings in the service index and weak tallies in the manufacturing sector seem at odds with a generally favorable performance of the overall economy. The strange results in these measures are similar to readings on consumer attitudes, which show less than ebullient moods among households. An uncertain outlook seems to be outweighing current favorable conditions.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's USECON database, with additional detail in the SURVEYS database. The expectations figure from Action Economics is in the AS1REPNA database.