U.S. Services Sector Momentum Rebounds in April
After falling 2.4 points in March, the Institute for Supply Management’s (ISM) non-manufacturing index rose 2.3 points to 57.5 in April – a print well above market consensus which called for only a modest rise to 55.8. The monthly rebound brings the index back near the highest level since late-2015.
Gains were broad-based with most sub-indicators recording an improvement on the month. Among the most notable, were gains in new orders (up 4.3 points to 63.2) and new export orders (up 3 points to 65.5) – with both at the highest levels since prior to the Great Recession.
Business activity (up 3.5 points to 62.4) and prices paid (up 4.1 points to 57.6) also recorded notable improvements – the latter having pulled-back in the prior two months.
Among the remaining indicators, imports and inventory sentiment fell on the month, but the main soft spot in the report was arguably a slight deterioration in the employment sub-index which eased 0.2 points to 51.4 – the lowest point since mid-2016 – after having fallen 3.6 points in the month prior.
Comments from survey contacts remained largely positive. Nearly all non-manufacturing industries surveyed reported growth in April, with agriculture, forestry, fishing & hunting being the only exception.
Key Implications
Contrary to its manufacturing equivalent, which deteriorated for the second consecutive month, the ISM nonmanufacturing index accelerated markedly in April. The monthly improvement is encouraging as the gains were broad-based, comments from survey respondents remained largely positive, and the headline print remained well within expansionary territory.
That said, in the context of a recent divergence between ‘hard’ and ‘soft’ survey-based data, there are two important elements worth highlighting in today’s report. First is the downtick in the employment sub-index which may point to some softness in this Friday’s payrolls report. The rebound in second quarter growth is expected to come as a result of a normalization in consumer spending, which hinges on a supportive labor market. A subpar payrolls print, along with a seemingly diminished appetite for durables goods as per April’s soft vehicle sales print, could pare back expectations as to the size of the rebound.
Today’s improvement in the prices sub-index, coming after two consecutive monthly declines is a very welcome development that may signal a break for softening price pressures. We expect the recent softness in price trends to be temporary. But should it persist, it could delay the Fed’s interest hiking cycle.
