Sifting Through ISM Services Report Signals | Episode 117 | 04.03.2024

Join Megan as she dissects the recent ISM Services report for March, unpacking the unexpected downturn and its implications for the economy. With a focus on crucial metrics like the price index, employment trends, and inflationary pressures, Megan provides comprehensive analysis. Despite the disappointing figures, learn why certain aspects of the report sparked optimism among investors and what it means for future market dynamics. Stay ahead of the curve and gain valuable insights into the ever-evolving economic landscape. Tune in now to stay informed and empowered in your investment decisions.

Well, that was a big miss, and I'm talking about the ISM Services Index. Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you on Wednesday, april 3rd and we're going to discuss in our regular segment of Markets with Megan the ISM Services Report that came out this morning. This is for the month of March and the ISM Service Report measures the service activity in our economy, and keep in mind that that is where the majority of the money that consumers spend is spent on services. There was an expectation this index would rise slightly, and this has been relatively elevated compared to its sister report, the manufacturing report, but instead this index came in much weaker than anticipated. It was the second consecutive month of a decline in this index.

Let's dig into some of the details and why the market actually liked this report. First of all, the price is paid component. This is extremely important because this is where sticky inflation comes from in the service sector, and what we saw was that index actually dropped to the lowest level we've seen since March of 2020. It still is in that level of expansion, which is a level above 50, but it is the lowest level we've seen since March of 2020. We also saw big declines in the backlogs of orders, the delivery times and then inventory sentiment which when you have a drop in that, that may mean that there's some inventory rebuild we may see in the future months. The other thing in the report is that we did see employment component in this report rise slightly. It was a very modest rise but it still is in contraction territory so we're still having some weakness there on the service sector from an employment standpoint.

Now why did the market react the way it does when there was a negative report? First of all, the prices pay component really drove the market. There's been a lot of concern about inflation pressures as of late and what we're seeing is that this prices pay component the market liked that. We will continue to assess the economic data that comes out that gives us indication on inflation. This is one month of a data report. There's been other things that have come out this week that have us a little bit concerned about inflation, particularly in the report that we discussed on Monday, which is the sister report to the service report, the manufacturing report. Those prices paid did jump.

So the Fed's getting mixed signals here from economic data. They're just going to have to wait and see, and that still is our base case scenario. We're still not sure that the rest of the market expecting rate cuts as early as June. We think that they may have to wait to the second half of this year before they feel confident that inflation is on a trajectory where they wanted to get to their target rate of 2%. That's all we have today. If you have any questions or comments, please feel free to reach out to podcast at verdence dot com. We'll be back on Friday with a much-anticipated jobs report for the month of March as well. Thank you.