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US: ISM services index fall contrary to expectations

by notizia24

ISM services index, which was announced in an environment dominated by the inevitably Russia-Ukraine crisis, showed a decline to 56.5 index value despite the 61.1 expectation for February. Service sector expansion stagnated in January as the rapid omicron spread. The activities were expected to recover a little more in February, however, a service sector activity that lost momentum, although it remained in the growth zone, draws attention. Labor shortages seem to have been a much greater concern for industries in the sector.


If we look at the sub-items; The business activity index decreased to 55.1 compared to 59.9 in January, while new orders decreased from 61.7 to 56.1. Supplier deliveries went to 66.2 from 65.7 reported in January, while the price index continued to increase from 82.3 to 83.1. Inventory index increased from 49.4 to 50.8 and entered the growth zone. Declining delivery times in December and January were an encouraging sign, but whether this progress will continue in February and beyond remains an open question. Service businesses are starting to replenish stocks, but stocks moving into growth territory may also indicate demand problems. It is a phenomenon that we will pay attention to in the growth items in the coming period. Price pressures remain high, however, and point to a trend that may only attract more attention as the recent geopolitical unrest has pushed commodity prices higher.


The Ukraine conflict will bring a new dimension to the event as economic growth sees the Omicron effect recover from the worst in the US and Europe, which turned out to be both modest and short-lived. Persistent supply constraints, both in terms of raw material supply problems and labor shortages, not only narrowed the sectoral production line, but also led to upward price pressures exacerbated by rising energy prices. These recovery trends and rising prices therefore put more pressure on major central banks to normalize monetary policy and lower their inflation expectations.


Economic activity in the first quarter appears to be mostly limited by COVID and supply chain disruptions rather than weak aggregate demand. As the war pushes commodity prices higher, especially energy (as well as possibly food in Europe), the supply disruption could worsen, especially if safety stock building rises again. Since the PMI figures were collected before Russia’s invasion of Ukraine, the effects reflected in the figures are mostly related to Omicron. Private sector employment seems to have grown strongly in February, while in the services sector, this index seems to have entered the contraction zone. It will be normal for us to see some improvement after February as worker absenteeism declines and workforce participation shows continued signs of rising.

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