US Services PMI Preview: Worry is normal but contained

• Service sector sentiment expected to decline slightly in June
• Index has been fading since reaching its post-recession peak in October 2018
• The China trade dispute has become background not crisis

The Institute for Supply Management will release its non-manufacturing Purchasing Managers’ Index for June on Wednesday July 3^rd at 10:00 am EDT, 14:00 GMT.

Forecast

The headline Purchasing Manager’s Index is predicted to drop to 55.9 in June from 56.9 in May. The business activity index will fall to 60.0 from 61.2. The new orders index was 58.6 in May and 58.1 in April. The employment index was 58.1 in May and 53.7 in April.  The prices paid gauge was 55.4 in May and 55.7 in April.

Business sentiment and the US economy

American business executives have been more pessimistic than the general population since the third quarter of last year. Sentiment in the services sector peaked at 60.8 in August 2018, in manufacturing at the same score one month later.  

The manufacturing outlook has declined steadily since that top reaching 51.7 in June, the lowest it has been October 2016 the month before the presidential election.  Attitudes in the service sector have held up better, dropping to 55.5 in April then rebounding to 56.9 in May.  

Consumer sentiment was affected by the partial government shutdown in late December and January as it sank from 101.4 in March a 15 year high, and 100.1 in September,  to 91.2 in January, the weakest it had been since October 2016. 

Reuters

Once the shutdown ended consumer sentiment rebounded smartly getting to 100.0 in May, which was among the best post-recession readings. The slip to 98.2 in June was negligible.

It is not only the overall indexes that have fallen. The manufacturing index for new orders plunged to 50 in June, right at the division between expansion and contraction. It’s the lowest this telling indicator has been since December 2015.  The employment index fell from 59.5 in October 2017 and 58.2 in September 2018 to 52.4 in April ths year, then recovered to 54.5 in June.

Reuters

Services have followed a similar pattern. New orders reached their top in February at 65.1, plummeted to 58.1 in April and climbed to 58.6 in May. Business activity also had its post-recession high in February at 64.7, dropped to 57.4 in March and went back to 61.2 in May.  Employment peaked earlier at 60.4 in September 2018, 0.1 point below the all-time record for this gauge set in January 2018.  The plunge to 53.7 in April was quickly reversed in May at 58.1.

Reuters

Manufacturing and service sentiment and trade

The sensitivity of the manufacturing sector to the trade dispute with China is most evident in the difference between its sentiment figures and those of the far larger service sector. New orders for manufactured goods and not surprisingly overall sentiment have been the most damaged.

The US economy has a smaller percentage of GDP dependent on trade than powerhouses of the international shipping lanes Germany and China because the service sector is the dominant force in the American economy comprising about 85% of overall activity.

Sentiment in services has retained its relative optimism as its business is largely domestic.  

The trade argument with China seems to have achieved a practical status quo. Keep negotiating, impose no new tariffs, do nothing to frighten the markets and wait for domestic pressure to bring around the other side.

The service sector can live with this practical approach even if its business is no longer booming. Sentiment should maintain an even keel until the overriding topic in the global economy is settled one way or another.