The ISM Services Index hit a recovery high and grew for the eighth consecutive month in January, reflecting increased optimism about the economy and the outlook for business despite Covid-19 restrictions and supply chain challenges.
The Institute for Supply Management index rose to 58.7 last month, or 1 point more than the seasonally adjusted 57.7 in December.
“This reading is the highest since February 2019 (58.8),” and represents growth for “all but two of the last 132 months,” said Anthony Nieves, chairman of the ISM survey committee.
Oxford Economics called it a “new recovery high,” and said respondents were generally optimistic about conditions ahead: business activity increased, new orders expanded, and employment rose.
“The stage is set for a strong rebound in the services sector heading into the summer,” especially as the number of new case rates declines and inoculations ramp up, said economist Oren Klachkin of Oxford Economics. COVID-19 will restrain recovery in the first quarter, but “growth will start to accelerate in Q2 as improving health conditions and widespread vaccinations allow business to gradually reopen.” Federal pandemic relief will also stimulate recovery, he said.
Fourteen services industries reported growth, including real estate, construction, wholesale trade, finance and insurance, and transportation and warehousing, while the four industries that reported declines are: arts, entertainment and recreation; educational services; retail trade; and utilities.
“The challenges facing the service sector are mostly concentrated in leisure and hospitality businesses,” said Jefferies economists Thomas Simons and Aneta Markowska. But the growth in other subsectors, especially construction, are compensating for that weakness.
The employment index rose to 55.2, its highest point since February 2020, from 48.7 last month, its lowest reading since August 2020. The lockdowns in California led to heavy job losses in December, which rebounded somewhat in January but still aren’t at prepandemic levels, according to Jefferies.
Other indexes are also hitting historic highs: The new orders Index increased 3.2 points to 61.8, its highest point since July. The business activity index, at 59.9, is also at a high.
Indexes at 60 or higher “tend not to be sustainable for any significant length of time regardless of what is going on in the economy,” but most indexes have been above 50 since June, Jefferies said.
The ISM index is not only improving, it is approaching its record high of 61.3, hit in August 2005. “As the vaccine distribution process continues and the reopening process plays out in the coming months, we expect the PMI will likely exceed that prior high,” the Jefferies economists said.