Composite activity in the US services sector held in positive territory for the 15th straight month in March but the key index unexpectedly fell on slower growth in new orders and a contraction in employment. And though prices paid fell more than 5 points to 53.4, the ISM survey chief said firms are still concerned about upward price pressures and that he does not expect the prices index to contract soon.

The ISM headline index fell 1.2 percentage points to 51.4 after dipping 8 tenths to 52.6 in February. The index came in weaker than Econoday's consensus for 52.7 and its 12-month average of 52.5.

"The decrease in the rate of growth in March and the decline in the composite index is a result of slower new orders growth, faster supplier deliveries and a contraction in employment," Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. On the upside, respondents in the March survey indicated continuing improvement in logistics and the supply chain, he said.

"Employment challenges remain a combination of difficulties in backfilling positions and/or controlling labor expenses," Nieves said."The prices index reflected its lowest reading since March 2020, when the index registered 50.4 percent; however, respondents indicated that even with some prices stabilizing, inflation is still a concern."

Asked about the impact of employment being a mixed bag and inflationary pressures continuing to linger, Nieves told reporters,"Indications are that...rate cuts may be delayed."

"I don't anticipate us seeing prices continue to go down," Nieves said."We could still see pricing continue to increase. I don't expect (the prices paid index) to contract any time soon." There is volatility in the prices of fuels and other commodities while electrical components and equipment have been in short supply over months, he noted.

Of the four sub-indexes that directly factor into the services PMI, the business activity index edged up 0.2 percentage point to a six-month high of 57.4 in March after rising 1.4 points to 57.2 in February. The new orders index fell 1.7 points to a three-month low of 54.4 in March after rising 1.1 points to a six-month high of 56.1 in February. It still indicates expansion for the 15th consecutive month.

The employment index showed contraction for the fourth time in 12 months. It rose 0.5 point to 48.5 in March after slipping 2.5 points to 48.0 in February:"Employment continues to be the mixed bag that it has been over the last several months," Nieves said.

The supplier deliveries index -- the only ISM index that is inversed fell 3.5 points to a record low of 45.4 in March (the fastest deliveries since 1997, when the ISM began tracking them). The index shows contraction for the second month in a row, indicating that supplier delivery performance was faster after being slower in January. In the last 12 months, the average reading of 48.7 reflects the fastest supplier delivery performance since December 2022, when the index stood at 48.5. A reading of below 50 indicates faster deliveries, which means either supply chains have recovered or customer demand has slowed, or a combination of both.

ISM services are expected to edge higher in March to 52.7 from 52.6 in February which extended a yearlong run in the mid-to-low 50s.

Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.