US ISM Non-Manufacturing PMI June Preview: Measuring the second wave impact

The American service sector is expected to follow manufacturing back into expansion June as the end of pandemic business closures have opened the US economy with a surge of consumption and activity.

Except for the shutdown months of March and April the service sector which accounts for about 85% of US GDP has not contracted since the financial crisis of a decade ago.

The purchasing managers’ indexes from the Institute for Supply Management is forecast to reach 50 in June from 45.4 in May and 41.8 in April.  Those two months were the first readings below the 50 expansion contraction demarcation since August 2009.

Non-Manufacturing PMI

New orders are projected to rise to 44 in June from 41.9 in May and 32.9 in April.  The equivalent manufacturing index had its largest gain on record in June, 24.6 points as it soared from 31.8 in May to 56.4.  A much smaller increase to 36.1 had been forecast.

The non-manufacturing employment index is projected to fall to 30.7 in June from 31.9 in May and 30 in April.

While a reopened US economy seems poised to regain its vitality sharply rising virus cases in a number of states, though fatalities have continued to fall, have caused re-imposition of varying degrees of business closures and other states have delayed planned liberalizations.. Most orders are related to indoor social activities such as bars and restaurants.

The average age of the positive case has dropped two decades to 35, which may account for the much lower hospitalization and fatality rate as young people are known to be largely unaffected by the infection.

Retail sales and consumption

Service sector managers may be heartened by the surge in consumption in May.

Retail sales, durable goods and personal spending numbers confirm the May return from April’s near cessation.

Retail sales plunged 14.7% in April, the largest one month drop on record and then soared 17.7% in May, more than double its 8% forecast. 

Durable goods, a subset of sales for long-lasting items, fell 18.1% in April and rebounded 15.8% in May, beating the 10.9% prediction.  Non-defense capital goods, the business investment proxy, dropped 6.5% in April, then rose 2.5% in May, much more than the 1% estimate.  Personal spending climbed 8.2% in May following the 12.6% April tumble and was the only consumption gauge to miss its forecast at 9%.  

Consumer confidence

Consumer confidence has also seen a notable revival.  

The Michigan survey of consumer sentiment has rebounded from its April low. The two month drop from February to April in each of the three indexes, sentiment, current conditions and expectations was the steepest in the 68 year series. 

Michigan Consumer Sentiment

The current conditions index recovered the most--April 74.3, June 87.1, followed by overall sentiment--April 71.8, June 78.1--and then expectations--April 70.1, June 72.3. 

Conference Board figures showed a sharper recovery. The consumer confidence index jumped to 98.1 in June from 85.9 in May, well ahead of the 91.6 forecast. The present situation index climbed to 86.2 from 68.4 and the expectations index rose to 106.0 from 97.6.

Conclusion

Manufacturing PMI normally is an indicator for the overall economy.  While the service sector will likely show a strong recovery in June there is no guarantee it will or can continue into the third quarter.

The variable is the progress of the second wave of the pandemic.  If governors are again to force to shutter large sections of their economy and severely restrict social activity all of the recent gains could be swiftly reversed.

Stocks just finished an excellent quarter.  The Dow rose 17.8% it best since 1987, the S&P 500 gained nearly 20%, its best since 1998 and the Nasdaq jumped 30.6%, its strongest since 1999.

The dollar has given back most of its modest rally of the last month as markets have not responded to the changing pandemic with the panic of March and April.  The euro is trading about a figure below its pandemic peak close of 1.3999, with the USD/JPY well below it fourth quarter average and the USD/CAD retreating to its March viral start line.