U.S. Services Gauge Falls to One-Year Low as Orders Soften

(Bloomberg) -- Growth in the U.S. services sector retreated in February to a one-year low as orders softened along with business activity, an indication supply constraints remain a hurdle for the economy.

The Institute for Supply Management's gauge of services fell 3.4 points to 56.5, below even the most pessimistic estimate in a Bloomberg survey of economists, according to data released Thursday. Readings above 50 signal expansion.

The group's index of new orders also showed the slowest growth in a year, while a measure of business activity -- which parallels the ISM's gauge of factory production -- fell to the lowest level since May 2020. Moreover, an index of employment contracted.

“Respondents continue to be impacted by supply chain disruptions, capacity constraints, inflation, logistical challenges and labor shortages,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “These conditions have affected the ability of panelists' businesses to meet demand, leading to a cooling in business activity and economic growth.”

The February decline brings the ISM figure more in line with other data. A separate report from IHS Markit on Thursday showed services activity bounced back sharply in February from a month earlier, to 56.5. That data also included firmer growth in orders and employment.

The overall ISM measure has fallen three straight months and is down almost 12 points from a series peak in November, before a pickup in coronavirus infections stifled activity.

“The fall in the headline index, despite the sharp drop-back in omicron cases last month, is a further illustration that wave had little tangible impact on the economy,” as measures of business activity and orders slid, Andrew Hunter, senior U.S. economist at Capital Economics, said in a note. “That is an overdue correction after those indices had overshot in previous months.”

Fourteen industries reported growth last month, led by construction and transportation and warehousing.

Services Employment

The group's gauge of services employment fell almost 4 points to 48.5, the weakest since August 2020, which may indicate a combination of lingering omicron effects and firms' difficulty hiring and retaining workers.

The impact of tough hiring conditions helps explain longer lead times and higher backlogs during the month. The ISM's index of supplier delivery times rose to a three-month high. A measure of unfilled orders climbed 6.8 points in February, the largest one-month advance in two years.

Select ISM Industry Comments
“Raw material increases, labor shortages, wage increases and transportation issues are still the primary issues affecting our operations and pricing.” - Accommodation & Food Services
“We are projecting 2022 to be busier than 2021. Our business volume should begin to increase significantly in March.” - Arts & Entertainment
“We are getting price increases with no notice...We are also struggling to get materials.” - Construction
“Inflation is contributing to budget constraints, supply chain restraints and labor shortages.” - Education
“Employee turnover within our company and with our suppliers is causing delays in decisions and orders.” - Finance & Insurance
“Severe labor shortages are expected well into 2022. Corporations need to increase wages and salaries to attract talent and get work done. Faster wage growth is expected to lead to increased inflation.” - Professional, Scientific & Technical Services
“Still dealing with long lead times for wire, polyvinyl chloride (PVC), steel, transformers and meters.” - Utilities

Such supply and demand imbalances are also driving inflation. A measure of prices paid for materials edged up to 83.1, near the highest on record. Commodities prices continue to rise, triggered by Russia's invasion of Ukraine that threatens to fuel inflation further.