PMI service gauge dips

February data signalled the first contraction of U.S. service sector business activity for four years. The decrease in output stemmed from only a fractional rise in client demand and a further contraction in new business from abroad as customers held back from placing orders amid global economic uncertainty and the coronavirus outbreak. As a result, business confidence remained historically subdued and employment growth slipped to the weakest since last November.

Efforts to attract and retain clients and a softer pace of input price inflation meanwhile led to a slower increase in output charges. The rate of selling price inflation eased to a three-month low.The seasonally adjusted final IHS Markit US Services Business Activity Index registered 49.4 in February, unchanged from the 'flash' figure, but notably down from 53.4 seen at the start of the year. The contraction in output was only marginal overall, but was nonetheless the fastest in over six years. Firms attributed the decline to less robust domestic demand conditions and a further fall in export sales.

In line with a slower expansion in client demand, new business rose at only a fractional rate that was the softest in the current four month sequence of growth. Reflecting the international impact of increased uncertainty was a further drop in foreign client demand, which led to the largest drop in new business from abroad since last November. 

Subsequently, service providers expanded their workforce numbers at the slowest rate for three months. The marginal rate of job creation was below the series trend, with growth weighed  

Marginal fall in output as demand conditions weaken
Slower rise in employment amid reduced pressure on capacity.

Business confidence strengthens, but remains relatively muted

Including IHS Markit U.S. Composite PMI™down by subdued demand and reduced pressure on capacity following a contraction in backlogs of work. Outstanding business decreased fractionally in February, representing the first fall since last October, as firms reported sufficient capacity to fulfill existing business requirements. 

Meanwhile, service providers were slightly more upbeat regarding the outlook for output over the coming 12 months in February. Although still well below the series average (data collection for the series began in July 2012), the degree of optimism picked up to a nine-month high. Greater confidence was supported by hopes of an uptick in client demand and the expansion of available service lines. Finally, inflationary pressures remained historically subdued midway through the first quarter as rates of input price and output charge inflation softened. The slower rise in selling prices was linked to some reports of challenging demand conditions and efforts to remain competitive and a softer increase in cost burdens. 

Furthermore, the rate of input price inflation was well below the series trend and the slowest for three months.