Reports Are Mixed, But the Service Sector Soldiers On

Source: http://www.flickr.com/photos/teegardin/

Source: http://www.flickr.com/photos/teegardin/

The Institute for Supply Management reported on Wednesday that its index for service-sector business activity fell 1.5 points to 53.9 in November from 55.4 in October. The decline indicates that composite non-manufacturing business activity is still growing but at a slower rate than in October. Economists had expected the index to register 55.5.

The non-manufacturing service sector accounts for the majority of U.S. economic activity, so the ISM report can be used to help diagnose the health of the overall business sector. In particular, market watchers have their eye on the business activity/production index, which fell 4.2 points to 55.5 in November, also indicating slower growth. Declines in new orders (-0.5 points to 56.4) and employment (-3.7 points to 52.5) were consistent with the headline trend. The sector is still growing, but more slowly.

Supply executives in finance and insurance report that “things are improving very slowly,” while retail and trade executives report that “Regulatory uncertainty is having an effect on consumers who are spending, but not aggressively.”

Overall, the news was not great, but the markets didn’t get too hung up on it. Slow growth is nothing new in the U.S., and major equity indexes edged higher on Wednesday afternoon, partially recovering from a slide that began on Monday. The best news the markets can get right now is that economic fundamentals are improving, and the ISM report supplied modest but positive data.

It’s worth pointing out that the index for new non-manufacturing export orders actually jumped 5 points to 58 in November, while the index for manufacturing new export orders jumped 2.5 points to 59.5. This suggests that international trade could be a tailwind for fourth-quarter economic activity, which is consistent with record high exports reported by the Bureau of Economic Analysis for October.

A separate services PMI report released by Markit Economics had a slightly different story to tell. Markit’s index climbed from 49.3 in October — a level indicating contraction — to 55.9 in November. The new business component showed accelerating growth, climbing to 56.9 from 54.2. The employment index, though, also declined, falling to 52.4 from 55.1.

“Like manufacturing, the service sector — covering 55% of the economy — staged a bounce back in November after the government shutdown temporarily disrupted business in October,” said Chris Williamson, chief economist at Markit. “However, the rebound is not large enough to dispel fears that the economy has slowed. Taken together, the PMI data for the first two months of the final quarter are well below the average seen in the third quarter.”

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