US Services Data Rebounds But Jobs, Backlogs "Highlight Fragility" Of US Economy

Despite a modest rise in April's headline Services PMI print to 52.8 (from 52.1) the details under the surface paint a different picture (remaining weaker than its post-crisis average of 55.6). The rate of employment growth was the weakest seen since December 2015 as backlogs of work declined for the ninth consecutive month, which is the longest continuous period of depletion since the survey began in late-2009.   ISM Services data also beat expectations, rising to 55.7 despite a drop in business activity and backlogs. As Markit warns, "the fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low."

April data highlighted a sustained recovery in overall business conditions across the U.S. service sector, led by faster growth of activity and incoming new work. However, the rate of job creation slipped down to its weakest so far in 2016 amid a lack of pressure on operating capacity and subdued confidence regarding the business outlook. At the same time, squeezed pricing power remained evident in April, with average tariffs broadly unchanged despite input cost inflation accelerating to its fastest since August 2015.

 

The Services sector (ISM and PMI) are both still lower than Dec 2015 (Fed rate hike) levels...

 

ISM Servcies Employment subindex suggests some pain ahead for payrolls...though it bounced back this month...

 

The breakdown is mixed...

  • Business activity fell to 58.8 vs 59.8 prior month
  • New orders rose to 59.9 vs 56.7
  • Employment rose to 53.0 vs 50.3
  • Supplier deliveries unchanged at 51.0 vs 51.0
  • Inventory change rose to 54.0 vs 52.5
  • Prices paid rose to 53.4 vs 49.1
  • Backlog of orders fell to 51.5 vs 52.0
  • New export orders fell to 56.5 vs 58.5
  • Imports rose to 54.0 vs 53.0
  • Inventory sentiment fell to 61.0 vs 62.5

ISM Respondents were mixed...

"Severe non-skilled labor shortage is hurting the construction industry." (Construction)

 

"Business is holding steady, revenue is almost as anticipated and costs are lower which is helping to maintain current profitability." (Finance & Insurance)

 

"We expect our business condition to improve in Q2 as compared to Q1. Typically, Q1 is our slowest period and business activity picks up later through the year." (Health Care & Social Assistance)

 

"Very favorable cost conditions all around." (Accommodation & Food Services)

 

"In higher education we are gearing up for the summer conference season. This impacts (increases) the spend in our service category and drives income from many campuses." (Educational Services)

 

"Recent upturn in oil prices is creating a slightly more positive outlook for those in the energy industry, but has not been enough to initiate hiring or spending." (Professional, Scientific & Technical Services)

 

"Business is still improving. Trucking has tightened due to produce hauling season." (Wholesale Trade)

 

"Heading into a slower season, but cautious optimism of modest gains from same period last year." (Retail Trade)

But as Markit concludes,

“The PMI surveys show the economy continuing to pick itself up after the stagnation seen in February, with growth accelerating for a second successive month in April. However, the rate of expansion remains tepid, reliant on sluggish growth in services as manufacturers report a stalling of production.

 

“The surveys are consistent with economic growth picking up from the 0.5% seen in the first quarter to a mere 1.0% at the start of the second quarter, suggesting the bounce-back from the weak start to the year is far from impressive.

 

The fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low seen in March, and optimism about the year ahead also remains close to a post-recession low.

 

“The drop in confidence seen so far this year is beginning to hit the labour market, with the survey signalling 160,000 extra jobs being created in April, down from an average of 200,000 in the first three months of the year.” 

Charts: Bloomberg