Service Sector Reports Confirm Weakness For The Nation's Economy

Markit Economics' service-sector report appeared to be signaling what was exaggerated weakness in the nation's economy, that is until Friday's depressing employment data. The services PMI finishes May at 51.3, up 1 tenth from mid-month but down a very steep 1.5 points from 52.8 in April. Growth in new orders, hit by weakness in investment spending, continues to slow and is among the weakest readings in the 7-year history of this series. Service firms unfortunately had little choice but to work down backlogs which contracted for a 10th month in a row which is a telling statistic. The sample is still adding to payrolls but by the least amount since January last year. Optimism over the outlook in this report, not surprisingly, is the weakest on record with respondents citing a range of factors weighing on business sentiment including weak orders, heightened uncertainty related to the presidential election and general concerns about the economic outlook. Prices are the only meaningful positive in the report, showing pressure for inputs, one likely tied to higher fuel costs, with selling prices showing a marginal gain. Watch for ISM non-manufacturing later this morning, a report that has been showing consistent strength and where a breakdown would confirm increasing signs of economic weakness.

...meanwhile...

The ISM's non-manufacturing index confirms what is proving to be a very weak month of May for the nation's economy. The index fell a very sharp 2.8 points to 52.9 to signal the weakest rate of monthly growth since January 2014. The report's employment index, in what matches this morning's data from the government, is the weakest component, down 3.3 points to a 49.7 level that signals marginal month-to-month contraction in the sample's employment levels.

But there is a solid signal of strength in the report as new orders, though falling 5.7 points, are still well over the breakeven level at 54.2. Yet even here, the rate of growth is the slowest since February 2014. Another plus, or at least not a negative, is no change for backlog orders which are at 50.0, still the weakest reading since May 2015. Demand for the nation's services is always a plus for trade data but this report is hinting at a downturn with the export index at 49.0 and the lowest level since April last year.

ISM's sample was active as far as output goes with the business activity index at 55.1, yet still down 3.7 points, and were still active importers with the related index at 53.5 for only a half point dip. Prices are also a positive, up 2.2 points to 55.6 and reflecting increases underway in energy prices in what is welcome news for policy makers who are trying to stimulate inflation.

Otherwise, however, there is very little welcome news at all in the May report. This report has been consistently upbeat which underscores the unwelcome importance of today's results.

Recent History Of This Indicator:
The ISM non-manufacturing index is expected to edge lower from 55.7 in April to 55.5 in May to point to steady and solid growth for the great bulk of the nation's economy. New orders were very strong in April, at 59.9 and helping to lift the sample's hiring as employment came in at 53.0 for the best reading of the year. The strength in the April report was a surprise and correctly pointed to improved gains for many subsequent indicators.