• The ISM Services PMI report held on to expansionary conditions by a slim margin in April 2023, rising slightly to 51.9 for the month
• New Orders component index rose to 56.1 for April 2023
• Inventory Sentiment among service industry businesses fell sharply to 48.9, posting the largest monthly decline of all components of the April 2023 report
• Pricing trends remained inflationary for services industries in April 2023, responding to continued consumer demand

The ISM Services PMI report came in at 51.9 for April 2023. The ISM Services index measures net activity among service industry businesses, with a reading of 50 implying an even split between those indicating expansionary and contractionary conditions. Services demand continues to be an area of focus as the Federal Reserve edges toward a pivot from tightening monetary policy to maintaining rates at a new steady-state plateau. Households are still spending toward service industry offerings, which themselves are still experiencing some of the strongest consumer price inflation trends among major categories. The upcoming summer months will likely renew upward price pressure on services through stronger demand, keeping the Fed’s goal of “Demand Destruction” unmet and, therefore, monetary policy outcomes not quite settled.

The Business Activity and New Orders components of the April 2023 ISM Services report both posted expansionary readings for the month. The Business Activity index fell moderately to 52.2, from 55.4 in March. While weaker than the prior month’s result, any reading above 50 indicates that services industry businesses still see overall improving conditions. Business Activity has seen a sharp acceleration entering the summer months of both of the past two years, suggesting that an upswing may be in store in the coming months as weather improves.

The New Orders measure bounced to 56.1 for April 2023, up from 52.2 in March. New Orders offer a leading indicator on Business Activity in the months to come. While the potential for an economic slowdown was cited in the April ISM Services PMI survey among respondents as a driver of the weaker current Business Activity result, the U.S. consumer seems difficult to subdue. Outright contractionary readings for Business Activity and a retreat in the New Orders result will likely be necessary before services providers cut back on spending and investment of their own to service ongoing demand.

Price pressures among service-providing industries posted a stable 59.6 result in the April 2023 ISM Services PMI report. This is relatively unchanged from the 59.5 reading in March but is still down significantly from the readings in the high 60s and 70s range seen throughout the second half of 2022 and in the opening months of this year. There will be some residual cost pressures filtering through to service industry businesses in the coming months as the brief oil price spike resulting from OPEC’s production cut in late March works its way through the supply chain.

However, the more recent and more dramatic oil price declines will alleviate some of the cost pressures seen by service industry businesses as the summer months progress. Pressure also seems to be abating from the labor cost perspective, with wage growth revealed to have slowed in the May 2023 ADP Employment Report. This coincides with recent trends in the Bureau of Labor Statistics’ survey results.

Services spending has been cited directly by the Fed in past communications regarding the target of their tightening campaign. The delayed reaction of economic activity to monetary policy action is traditionally assumed to be 12 to 18 months, which matches current conditions to the start of the Fed’s aggressive tightening efforts beginning in early 2022. April’s still-expansionary ISM Services PMI reading therefore provides support for PNC’s continued expectation of another 25 basis point rate hike for the Fed Funds rate out of today’s (May 3, 2023) meeting, followed by a pause in the tightening cycle.

A pause after the May rate hike would allow the remainder of that presumed lag to have its impact while reducing uncertainty among businesses and consumers regarding future actions. Service industry businesses would then be able to respond to changes in consumer demand, for better or worse, through the busy summer months and establish new equilibrium expectations as the overall economy in all likelihood slows.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.