The ISM Non-Manufacturing, or Service, survey showed that the service side of the economy continued to expand in April, and is doing so at the same rate it was in March. This is the fourth month in a row that the Service survey was above the magic 50 level that separates expansion from contraction.
Like the Manufacturing survey, it is comprised of ten sub-indexes (that roughly mirror those in the Manufacturing survey). The reading was well below consensus expectations that were looking for a reading of 56.1. Six of the sub-indexes showed improvement in April, while four deteriorated. Eight are above the magic 50 level, and two are just barely below it.
The table below from the ISM release shows the comparison of the Service to the Manufacturing survey, which was released on Monday. In recent months, the ISM survey has consistently shown that the manufacturing side of the economy is healthier than the service side, and in April, the overall index was a full five points higher on the manufacturing side.
Breakdown by Sub-Index
The most important of the sub-indexes for measuring how well the economy is doing right now is the business activity index, which corresponds to the production index on the manufacturing side. It is at a very healthy 60.3, up 0.3 points on the month, but lags well behind the 66.9 reading on the manufacturing side, which was a very strong 5.8 point rise from March.
If the business activity index is the most important with regards to the current state of the economy, then the new orders index tells the most about the future. There the news is not as good. While the current level of 58.2 still indicates a healthy level of growth, it is down a sharp 4.1 points from last month, while new orders showed a share 4.2 point rise to 65.7 on the manufacturing side.
With the momentum still towards higher production, but with the momentum of new orders falling, it is not surprising that the order backlog sub-index fell a sharp 6.0 points and moved from expansion to contraction with a reading of 49.5.
Of particular interest is the employment index, particularly this week with the employment report due out on Friday morning. There the news is not so good. The ISM numbers show that service sector employment is continuing to contract, the 28th month in a row that it has, with a reading of 49.5, down 0.3 points from last month.
However, I would note that the ISM services numbers have been distinctly at odds with what the BLS has been reporting recently, with private service sector employment expanding in each of the first three months of the year. It also seems at odds with the ADP report that came out this morning, which showed growth in service sector jobs and a contraction of goods producing jobs.
However, that contradiction might be more apparent than real. In the ISM calculations, construction is part of the non-manufacturing survey, and ADP noted that manufacturing actually gained jobs within the goods producing sector, while construction employment continues to be demolished.
On the other hand, inventories were increasing in the service sector, a sharp turn-around from contraction last month as the inventory sub-index rose to 54.5 from 46.5 in March. The 8.0 point rise was the biggest of any of the sub-indexes.
In sharp contrast, the manufacturing side moved from inventory expansion in March to a slight inventory contraction in April, and the 5.9 point drop was one of the biggest on the manufacturing side. With the exception of retail and warehousing, though, inventories are generally less important on the service side of the economy than they are on the manufacturing side (sometimes only amounting to what is in the office supply cabinet).
The respondents reported both that the amounts they were importing were increasing, as were their export orders. However, export orders were growing at a slightly slower pace as the export sub-index dropped 0.5 points to 57.0.
The import index, on the other hand, jumped 5.5 points to 56.5. But note that the export side still has the absolute advantage. If the dollar continues to strengthen, look for that advantage to wilt rather quickly.
Then again, exports are generally a smaller part of the business mix for non-manufacturing companies than they are for manufacturing firms. Service firms might not export that much, but some of the biggest importers are on the service side of the economy. After all, how much domestically produced stuff do you find these days in a Wal-Mart (WMT) or a Target (TGT)?
That’s not to say that service companies don’t have large international operations. Yum! Brands (YUM), for example, has far more restaurants overseas than they do here, but they are not delivering the Pizza Hut pies from here, they make them over there (and hence they are not exports).
A Final Overview
All in all, I would rate this as a somewhat disappointing report, which is in distinct contrast to the very encouraging manufacturing report. It was far from a disaster, but not particularly good. I find the declines in the new orders and order backlog numbers to be troubling and a possible indication that the economic recovery might well be less robust in the second half of the year than it is in the first half. It is clearly not pointing to a double-dip recession, but a possible loss of momentum.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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