US service sector expands moderately in March; price pressures easing


U.S. services industry growth slowed further in March, while a measure of prices paid by businesses for inputs dropped to a four-year low, which bodes well for the inflation outlook.

The Institute for Supply Management (ISM) said on Wednesday that its non-manufacturing PMI fell to 51.4 last month from 52.6 in February. It was the second straight monthly decline in the index since rebounding in January.

A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the index edging up to 52.7 in March. The PMI remains consistent with an economy that continues to expand, though at a moderate pace.

Growth is slowing following 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022. The U.S. central bank is expected to start cutting rates this year, but the timing will depend on how inflation behaves.

Services are the main driver of inflation, via higher wages.

A measure of new orders received by services businesses slipped to 54.4 last month from 56.1 in February. Production remained strong, with a gauge of business activity edging up to 57.4 from 57.2 in the prior month.

With demand slowing, so did services inflation. The survey’s measure of prices paid for inputs by businesses dropped to 53.4, the lowest reading since March 2020, from 58.6 in February. Data last week showed services inflation excluding energy and housing cooling considerably in February after accelerating in January.

Supply of inputs to services business improved further last month. The supplier deliveries measure declined to 45.4 from 48.9 in February. A reading below 50 indicates faster deliveries. The drop in this measure contributed to the decline in the services PMI.

The survey’s measure of services sector employment ticked up to 48.5 from 48.0 in February. Employment levels likely remain depressed by a combination of worker shortages and layoffs amid a still fairly tight labor market. This measure has not been a good predictor of services payrolls in the government’s closely watched employment report.

Government data on Tuesday showed there were 1.36 job openings for every unemployed person in February compared to 1.43 in January.

March’s employment report on Friday is likely to show that nonfarm payrolls increased by 200,000 jobs in March after rising by 275,000 in February, according to a Reuters survey of economists. The unemployment rate is forecast unchanged at 3.9%, and annual wage growth cooling to 4.1% from 4.3% in February.
Source: Reuters

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