The Institute for Supply Management, the Tempe, Arizona-based trade group, this morning reported that non-manufacturing activity had expanded in April for the 17th consecutive month. However, the moderate gain achieved in this area was not the headline event. Rather, it was the deceleration in that rate of improvement that struck a sensitive nerve in the bullish case for the economy.
Specifically, the data showed a survey result of 52.8. That was modestly above the 50.0 level that suggests the services sector, which accounts for some 70% of aggregate economic activity, is on the increase. (A reading below 50.0, but above 42.0, implies that non-manufacturing is contracting, but that economic activity, in general, is still expanding. A survey result below 42.0 is consistent with not only a contracting services sector, but a recession, as well.)
The shocker in this latest report is that non-manufacturing had been expected to come in 56.9 last month; in March, the reading had been 57.3. The sharp deceleration was primarily caused by a slower rate of growth in production (53.7 in April versus 59.7 in March), a sharply lower rate of improvement in new orders (52.7 versus 64.1), and more modest slowdowns in employment (51.9 versus 53.7) and backlogs (55.5 versus 56.0). Prices, which remained the strongest individual component in the report, likewise slowed its frenetic rate of increase, coming in at a still bouyant 70.1, versus 72.1 the month before. With inflation pressures starting to build across the economy, this moderating increase should be well received by the inflation hawks, both inside and outside the Federal Reserve.
Overall, though, the composite report was not welcome news for those speculating that the second-quarter economy would be notably stronger than its opening-period counterpart. In the first quarter, the nation's gross domestic product had risen by a listless 1.8%. We would not want to overreact to this one data point, but should it presage a trend in other areas, our forecast of a step-up in overall business activity to the 3% level, or so, this quarter, could well prove aggressive.
Indicative of the slower rate of growth in this area was the fact that the 52.8 reading matched the weakest performance of the past year, with a 52.8 survey result also having been obtained in August. Aside from that month, the last year has seen a range of 53.5 to 59.7, with the peak achieved in February of this year. April was, therefore, the second month in succession that non-manufacturing activity had seen slower improvement.
As for qualitative judgments on the trends in the services sector, comments from purchasing managers ranged from observations that business activity was largely unchanged, to indications that in some categories business strength seemed to be picking up slowly, to a sense that continuing uncertainty about the economy was rather widespread. A more common thread throughout the remarks by these purchasers is that prices are becoming a problem, not only in higher fuel charges but also in a range of price categories. It is early to talk of stagflation in the non-manufacturiong sector, but this latest result is clearly disappointing.
In sum, we would want confirmation in other areas for us to conclude that a trend is setting in. The companion report on manufacturing was more upbeat. That report was issued on Monday by the ISM, as well. Auto sales, for April, released yesterday, were also positive, with strong demand across most vehicle categories. For now, we sense that this latest report is something of an aberration, but the upcoming service-sector data, scheduled for release in the first week of June, will be closely watched by the markets and economists alike for any continuation of the trend in today's critical economic component.
At the time of this article, the author did not have positions in any of the companies mentioned.