Service sector activities grew at a much slower pace in March after posting solid growth in the first two months of the year, the Institute for Supply Management reported on Wednesday.
The slowdown came amid increasing signs of a pullback in overall demand as tightening monetary policy, financial instability and lower excess savings weighed on sentiment.
March’s services composite index was 51.2, slightly higher than the long-term threshold of 49.9. An index above 49.9 indicates expansion.
Most subcomponents declined in March, led by a sharp drop in the growth rate of new orders, a proxy for future services activities.
Hiring also slowed in March as the employment subindex fell to 51.3 from 54 in the prior month.
Together with the lower-than-expected manufacturing employment index released on Monday, we expect some downside risks to our forecast of 220,000 in net job gains when the employment report is released on Friday.
The good news is that lower demand helped prices paid for services to slow further in March.
The prices paid subindex dropped to below 60 for the first time since late 2020. Services inflation has been one of the Federal Reserve’s main areas of focus in recent months.
While March’s number was a welcome sign, the recent shock in oil prices because of a supply cut from OPEC+ might offset the improvement in service inflation as many service-providing industries are highly sensitive to energy prices.
The takeaway
We expect the service sector to grow at a slower pace in the first half of the year before showing recession signs in the second half as the full impact of rate hikes sinks in. As we have forecast, the economy is on track to tip into a downturn in the second half of the year.
