Service sector continues to grow in February

The service sector continued to grow in February for the 14th straight month, according to the Institute for Supply Management on Tuesday.

While the overall service index pointed to a slightly slower February, falling to 52.6 from 53.4, the subindexes for business activity and new orders registered faster growth on the month. That growth is in line with our expectations that the service sector will continue to be a strong support for the economy.

ISM services

At the same time, there are signs that service prices have been stabilizing. The prices paid subindex fell by a sharp 5.4 points to 58.6 in February, staying lower than the six-month moving average at 58.9. Except for the spike in January, service prices have remained around the pre-pandemic level, according to the survey.

While demand is slowing, the normalization of the supply side has also continued to keep price pressures down. Inventory sentiment has stayed positive for more than six months, while the backlog of orders has been neutral over that time.

Also in the survey, employment—a proxy for future wage costs—contracted in February, marking the second contraction in three months. Not only should that decline ease concerns over the pass-through effect of wages on inflation, but it is also more evidence that the labor market is cooling

The recent spike in job gains in December and January will most likely to be short-lived in our estimate. We think that the labor market will come into a more balanced state in the next six months with job gains normalizing between 50,000 and 100,000 each month, a necessary condition for inflation to reach the Federal Reserve’s target of 2%.

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This article was written by Tuan Nguyen and originally appeared on 2024-03-05.
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