Expansionary Reading of 55.1 for February 2023

• The ISM Services PMI report remained in expansionary territory in February 2023 at 55.1
• New Orders show accelerating demand in Services industries, component index up to 62.6 for February 2023
• ISM Services PMI confirms continued strong hiring demand, with the Employment component index up to 54.0 for February 2023
• Pricing trends remain inflationary for Services industries in February 2023, posting a solidly expansionary 65.6 reading for February 2023

The ISM Services PMI report came in at 55.1 for February 2023. This follows January’s reading of 55.2, with only one post-pandemic reading having fallen below the expansionary threshold of 50.0 thus far (49.2 in December 2022). 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 has been a primary driver of the Federal Reserve’s narrative that inflation remains a cause for concern in the U.S. economy. February’s ISM Services PMI report reinforces this sentiment and joins what may be an emerging rebound in the ISM Manufacturing report which revealed New Orders and Commodities Prices driving back toward expansionary readings this week. 

The New Orders component index of the ISM Services report posted its highest reading since November 2021, at 62.6 for the month in February 2023. The topline ISM Services PMI report has shown no signs of slackening demand even as concerns about a recession in the U.S. economy gained momentum entering the new year. 

Strengthening New Orders among service-providing businesses will lend support to the Federal Reserve’s narrative that further monetary policy tightening will be needed out of their next few meetings in order to keep consumer price inflation from spiraling upward in response to unrelenting consumer demand. 

Service industry costs remained firmly in expansionary territory in the February 2023 ISM Services report, coming in at 65.6 for the February 2023 reading. Unlike the monthly ISM Manufacturing report, service providers have seen no respite in pricing pressures. February’s reading of 65.6 -well above the breakeven threshold of 50.0 – is still the lowest reading on cost pressures since broad economic recovery began as the U.S. economy reopened after pandemic closures. 

Services also remain the focal point of consumer activity in the U.S. economy, meaning the strongest price hikes continue to be centered on where U.S. households are spending their paychecks. Labor is also an ongoing source of cost pressure for service providers, with wage growth cooling only modestly to start this year and worker shortages among service industries still evident. So long as households continue to spend on service activities, inflationary pressures will remain a threat to the stability of the U.S. economy. 

Between now and mid-2023, PNC expects two further 25 basis point rate hike for the Fed Funds rate in the first half of 2023. Higher interest rates on rapidly-accumulating consumer debt, especially among lower-income households who boast the highest propensity to consume among income tiers, still threatens to stall consumption activity in the second half of 2023. Inflation’s toll on the cost of living and the run-down in savings cushions will also play their part. Spending on services, alongside service providers’ response to cost pressures and intractable consumer demand, will keep the ISM Services PMI report in the spotlight in the coming months, indicating whether and when calmer waters on the inflation front will come into sight.