US services sector growth edges down in February

Activity in the US services sector cooled in February, according to survey data released on Tuesday, with analysts expecting growth to slow this year as elevated interest rates bite.

The services index of the Institute for Supply Management (ISM) slipped to 52.6 percent last month.

This is still above the 50-point mark separating growth from contraction in the sector, but below January’s 53.4-percent reading.

Despite the deceleration, the services sector has grown for the 14th straight month.

“The slight decrease in the rate of growth in February is a result of faster supplier deliveries and the contraction in the Employment Index,” said ISM survey chairman Anthony Nieves.

He added that even as most respondents are positive about business conditions, they remain “concerned about inflation, employment and ongoing geopolitical conflicts.”

While the employment index shrank for the second time in three months, ISM data showed that business activity and new orders picked up.

One respondent in the accommodation and food services sector said Red Sea issues have yet to hit purchasing conditions but that they are monitoring the situation closely.

Another respondent added that “business remains strong across the US industrial construction sector.”

Construction materials have returned to prepandemic levels, and “the outlook for 2024 is strong,” the respondent said.

“We think growth in the services sector will slow gradually as the lagged effect of higher rates starts to weigh more heavily,” said analysts at Pantheon Macroeconomics in a recent report.

This is “especially since the excess savings consumers built up during the pandemic now seem to be exhausted for most households,” Pantheon added.

But the analysts cautioned that the headline ISM figure can be a “poor guide” to growth in consumer spending on services.