Source: Economics Group of Wells Fargo Bank, N.A.
Summary
A cooling in service-sector activity was on display in the March ISM Services report. The prices paid index dropped to a four-year low and the employment index stood in contraction territory for the third time in four months.Some Improvement on Prices
The ISM services index came in at 51.4 in March, signaling a more modest pace of expansion in the service sector (chart). The narrative of a booming service sector amid struggles for manufacturing is giving way to a more balanced state of activity. Monday’s manufacturing ISM surprised on the upside; today’s services ISM surprised on the downside. The upshot is the narrowest gap between services and manufacturing since 2022.
The eye-catching development in the details is how the prices paid component dropped more than five points to 53.4 (chart). A challenge for the Federal Reserve has been the way robust spending on services has slowed progress in bringing down services inflation. On that basis, the drop in the prices paid component is encouraging, at least at face value. The prices paid index dropped to its lowest reading since March 2020; however, the fact that 13 industries are still reporting an increase in prices suggests that even with some stabilization in the rate of price growth, inflation is still a concern.
The biggest overall move among sub-components was a 5.5 point drop in order backlogs to a seven-month low of 44.8. That was an even larger drop than the regular new orders index which fell 1.7 points to come in at 54.4 in March.