US Service sector: Activity is not slowing much – Wells Fargo

On Friday, the US February ISM Service PMI was released. Analysts at Wells Fargo point out the report showed that activity is not slowing much and that is keeping pressure on prices and on margins. They argue that it is happening alongside an upswing in hiring, giving the Federal Reserve the green light for further rate increases.

Stop underestimating the Service sector

“The resilience of the service sector was on full display for a second straight month in February. The ISM services index had previously dipped into contraction territory at the end of last year amid a two-month slowing in real consumer spending. A jump to 55.2 in January took most forecasters by surprise and set the stage for a run of better-than-expected January economic data on jobs, spending and production.”

“The continued hiring in services and more neutral stance of maintaining employees in manufacturing suggests employers added jobs at a decent clip in February. When nonfarm employment data are released next Friday, we expect to see employers added 270K net new jobs during the month.”

“The resilience of service sector activity may turn up the pressure on policymakers at the Federal Reserve to do more to combat inflation. The prices paid component cooled, but only slightly, and a reading of 65.6 is consistent with prices continuing to rise. Services inflation will be slower to abate, but still-high price pressure combined with continued tightness in the labor market means the Fed's job of getting inflation on a sustained path back to 2% inflation is not yet done.”