ISM Services Slumps Into Contraction, Factory Orders Plunge Most Since COVID

After a surprise bounce in November (and following S&P Global’s Services PMI weakness), analysts expected ISM Services survey to show deterioration in December and they were right but the magnitude was very significant. ISM Services tumbled into contraction at 49.6 (vs 55.0 exp) from 56.5 in November. That is the biggest drop since 2020 and the first contraction since May 2020…

Source: Bloomberg

ISM Services New Orders collapsed…

Source: Bloomberg

Across both ISM and PMI and Services and Manufacturing sides of the economy, December saw weakness accelerating with all in contraction…

Source: Bloomberg

Notably, The Fed is usually easing when this is happening…

⚠️ The Fed is usually in easing mode when both ISM services and manufacturing new orders are below 50! We’re now there… (Note services only goes back to late ’90s) $USD pic.twitter.com/9HIxadJpuB

— Viraj Patel (@VPatelFX) January 6, 2023

Broadly speaking, ISM respondents are wary of inflation and slowdown signals:

“Business is slower than usual. Seems to be a three- or four-month trend. We expect it to pick up after the first of the year.” [Agriculture, Forestry, Fishing & Hunting]

“Residential new construction continues to be hindered by higher interest rates, slowing sales dramatically. A shift to rental projects seems to be a trend for all builders.” [Construction]

“We’re dealing with inflation, increasing labor costs, longer lead times and the higher education sector struggling to retain employees.” [Educational Services]

“Business conditions for year-end 2022 are good, but not great. Preparing for a possible recession in 2023, but with some optimism in the overall economy.” [Finance & Insurance]

“Continue to see product pricing, staffing and labor cost increases across the board, with almost no easy savings opportunities in our supply chain operation. Feel that this will be the standard in 2023.” [Health Care & Social Assistance]

“Electronic component supply is becoming much better week by week.” [Information]

“Activity level remained flat as we began to round out the year.” [Mining]

“Seeing continual slowing of orders, along with a more receptive supply base.” [Professional, Scientific & Technical Services]

“We are optimistic, although concerned, about continued inflation pressures, lead times that remain well above typical and supply chain issues that just won’t go away. Increasing interest rates are dampening the residential housing construction market, which only adds to the concerns.” [Real Estate, Rental & Leasing]

“Higher-than-average increases in end-of-year software and support renewals due to increased labor and economy costs.” [Retail Trade]

“We are in the busiest season of the year in our business, and inflation is definitely putting the squeeze on our margins.” [Wholesale Trade]

Meanwhile, on the other side of the economy, factory orders plunged more than expected in December (-1.8% vs -1.0% exp)…

Source: Bloomberg

That is the biggest drop since April 2020 (peak COVID lockdowns).

So, in December, both sides of the economy saw significant weakness accelerating… AND YET UNEMPLOYMENT RATES PLUNGED?