While a gauge of prices paid by services organizations decreased to the lowest in nearly three years, the U.S. services sector slowed more than anticipated in March as demand cooled, giving the Federal Reserve a boost in its fight against inflation.
On Wednesday, the Institute for Supply Management (ISM) reported that its non-manufacturing PMI dropped from 55.1 in February to 51.2 last month. More over two thirds of the economy is made up of the services sector, and a reading above 50 implies growth in this sector. Reuters polled economists, who predicted that the non-manufacturing PMI would fall to 54.5.
The ISM claims that over time, the PMI implies growth in the broader economy when it is above the 49.9 threshold. However, the less-than-expected number, which followed last month’s persistent weakening in manufacturing activity, raises the possibility of a recession this year.
The manufacturing PMI, which the ISM released on Monday, dropped in March to its lowest level since May 2020. The manufacturing PMI’s subcomponents all went below the 50-point barrier for the first time since 2009 during this period.
Consumers are shifting their spending from products, which are often purchased on credit, to services, which are supporting the services industry. The survey’s indicator of new orders received by service industries fell from 62.6 in February to 52.2 last month.
Inflation in the services sector continues to decline with the slowing of demand, albeit it is still high. From 65.6 in February, a gauge of the prices services industries paid for inputs dropped to 59.5. Due to the fact that service pricing are often more stable and less sensitive to changes in interest rates, the services sector is currently at the center of the battle against inflation.
According to some economists, the ISM services prices paid index is a reliable indicator of inflation in personal consumption expenditures (PCE). The PCE price indexes are monitored by the Fed, which bases its monetary policy on a 2% inflation target.
A steady improvement in supply was also apparent in the slowdown in prices that services companies paid last month. The survey’s gauge of supplier deliveries to the services sector dropped from 47.6 in February to 45.8 in March. Faster delivery are indicated by a value below 50.
Employment growth in the services sector also slowed down. The survey’s indicator of employment in the services sector decreased from 54.0 in February to 51.3.
This strengthened the case for a loosened labor market. At the end of February, there were 9.9 million unfilled positions, the fewest since May 2021, according to a government data released on Tuesday. Nevertheless, in February there were 1.7 vacant positions for every unemployed worker.