US Services Sector Slows in February; Inflation Moderating

• US services industry growth slowed a bit in February amid a decline in employment, but a measure of new orders increased to a six-month high, pointing to underlying strength in the sector.
• Despite the weakness in employment, comments from services businesses in the Institute for Supply Management (ISM) survey on Tuesday were generally upbeat and suggested labour shortages remained a constraint for some. There were also no signs that inflation was picking up after a jump in prices at the start of the year, which is considered to be pleasing news for Federal Reserve officials.
• Though financial markets expect the U.S. central bank to start cutting interest rates this year, the timing is uncertain because inflation remains high, with most of the price pressures coming from services such as housing and utilities as well as finance, healthcare, and recreation.
• "While the easing of price pressure and moderation in hiring tilt this report in a dovish direction, the Fed will ultimately want to see these developments translate to the hard data on inflation and job growth," said Tim Quinlan, senior economist at Wells Fargo in Charlotte, North Carolina.
• The ISM said its non-manufacturing PMI slipped to 52.6 last month from 53.4 in January. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the index little changed at 53.0.
• The PMI was consistent with continued economic expansion despite 525 basis points worth of interest rate hikes from the Fed since March 2022. Fourteen services industries reported growth last month, including construction, retail trade, and public administration, as well as utilities and wholesale trade.
• Arts, entertainment and recreation, mining and real estate, rental and leasing reported contraction. The measure of new orders received by services businesses increased to 56.1 last month, the highest level since last August, from 55.0 in January. Export orders, however, slowed after surging in January.

(Source: Reuters)