Drop in orders leads key service sector gauge lower

Summary

The ISM Services Index slipped to its slowest pace of expansion since May 2020. New orders dipped 9.9 points, perhaps due to the fact that long-depleted inventories have at last been re-stocked. On balance a disappointing report, but not without some bright spots.

Just When Things Were Going So Well

The slump in service sector activity is jarring after a run of better-than-expected economic indicators in recent weeks. There is no one-off factor here that cushions the blow. The new orders component slumped 9.9 points and at 51.9, remains in expansion territory, but only barely so.

In last week's personal income and spending report, we saw most of the strength was concentrated in durable (+8.4%) and non-durable goods spending (+4.3%), whereas services outlays increased only 0.7%.

We are convinced that a surge in services spending is coming and given the rapid decline in new COVID cases throughout February, we thought we would see some indication of that improvement in today's report. But, perhaps the only tepid growth in service spending should have tipped us off that February might be too early for signs of major growth in the service sector.

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