The Institute for Supply Management’s composite index of services fell 1.2 points to 51.4 a four-year low. The drop in the report released today, April 3, was the second month in a row.
The services report came a day after the manufacturing sector report showed costs rising in the sector. Which, of course, led some investors and traders to worry that the Federal Reserve might put off the start of interest rate cuts beyond its June 12 meeting.
The yield on the 10-year Treasury, which hit a new intraday high for 2024 at 4.37% yesterday, closed at 4.35% today. That’s still 17 basis points higher in a month.
The relative calm today was also a result of remarks from Jerome Powell and other Fed officials that boiled down to
“We told you the road to 2% inflation would be bumpy, but we haven’t seen anything in the recent data to change the direction of our policy or the timing of cuts.” A June cut, in other words, remains very much on the table.
It helped too that the subindex in today’s report of prices paid for materials and services decreased more than 5 points to 53.4, the lowest since March 2020. That stands in stark contrast to ISM data earlier week showing a manufacturing input-cost index climbed to the highest level since July 2022, suggesting the pace of goods disinflation is leveling off.
This pattern makes sense to me and is even somewhat encouraging. Goods inflation has led the overall drop in inflation with inflation in the services sector hanging stubbornly high. The ISM reports for manufacturing and services suggest that while goods inflation is slowing the pace of its drop, the decline in services inflation may be set to play catch up.
“The plunge in the prices paid index to the lowest level since the pandemic began implies that core services ex-housing inflation, aka supercore, will resume falling back toward its pre-pandemic normal rate,” Stephen Brown, deputy chief North America economist at Capital Economics, said in a note on the ISM reports.
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The overall services index was depressed by the sub-index of delivery times, which dropped 3.5 points to the lowest in ISM data back to 1997. That sign of improving supply chains helps explain why order backlogs at service providers shrank at the fastest pace since August.
