• US service sector is forecast to expand in moderately in February
  • Manufacturing PMI dropped to a two-year low in February
  • China trade dispute or the cumulative effect of the Fed?

The Institute for Supply Management (ISM) will release its non-manufacturing Purchasing Managers' Index for January at 10:00 am EST, 15:00 GMT March 5th. 

Forecast

The non-manufacturing purchasing managers’ index is predicted to rise to 57.2 in February from 56.2 in January. The business activity index is expected to increase to 59.9 in February from 59.7. The employment index was 57.8 in January, up from 56.6 in December. The new orders index was 57.7 down from 62.7 in December and November. The prices paid index was at 59.4 up from 58.0 in December.

The US Economy in the First Quarter

The partial government shutdown which ended on January 25th, like the Y2K software fear of two decades ago, was a threat that did not live up to its name.  Planes did not fall out of the sky as the millennium turned, elevators did not freeze in their shafts. That New Year was no more eventful than the previous one, or the one after.

Though about a quarter of the federal government was closed for 35 days it did not precipitate the changes in the ISM manufacturing index.

The decline began in September with the fall to 59.5 from 60.8 in August, a 13 year high, and bottomed in December at 54.3.  The drop started before the shutdown was contemplated, recovered in January at its height to 56.6 and then plunged again in February to 54.2, the lowest since December 2016. The February reading was forecast to be 55.5.

Reuters

The new orders index showed a similar but longer pattern. It peaked earlier, December 2017 at 67.3 a 14 year top, fell for seven months to 60.8 in July, recovered to 64.8 in August and 61.8 in November before plunging to 51.3 in December.  January’s return to 58.2 in the month when the shutdown should have had its largest effect, and the fall again in February after its end, as with the  headline PMI index above, renders the closure  effect argument nil.  

Reuters

The employment index executed the same template.  Its 2018 top came in September to 58.2 followed by a drop to 56.6 in October, a recovery to 57.7 in November and then a three-month fall, with no recovery to 52.3 in February. It has now surrendered all of its post-2016 election surge.

That the shutdown played little of no part in the changes in these indexes only means that we have to search for other answers. 

Two candidates come to mind.  The first is the US/China trade dispute. Has the cumulative effect of a year of increasing tariffs and rhetoric so dampened the outlook for domestic manufacturers that despite a strong American economy their business and sentiment has fallen sharply?  We may have an answer to this soon as the trade negotiations between the two countries seem to be reaching a climax.

The second possibility is that the Federal Reserve’s three year normalization policy may have reached critical mass. This impact will be harder to discern. As the Fed has said, we are data dependent.  That means that the governors know the impact of higher rates on an economy, they just don’t know at what level they will begin to work in the current environment.  

The services PMI peaked in November at 64.3. Its subsequent drop to 58.0 in December and slight recovery to 59.4 the following month are not a set up for divergence from the manufacturing index.

Reuters

If the cause of the manufacturing index decline is the China dispute, it is possible the service sector which does relatively little business with the mainland will be unaffected and continue its recovery in February.  If not services will soon follow wherever manufacturing leads.

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD: trade war optimism skews the risk to the upside

The EUR/USD pair has rallied to 1.1062 on Friday, its highest since September 20, as risk-on prevailed heading into the weekend. Reports on progress in trade talks between the US and China.

EUR/USD News

GBP/USD's rally stalls in the open as weekend headlines highlight Brexit deadlock

GBP/USD is a touch softer in the open on Monday, starting off the week in the consolidation of Friday's upside extension to the highest levels since mid-summer. 

GBP/USD News

USD/JPY consolidating bull rally into 108 handle on US/Sino trade deal optimism

USD/JPY starts out the week flat to Friday's close after markets rallied at the end of the week. Bullish geopolitical undertones in the form of a US/Sino 'phase 1' trade deal help lift USD/JPY onto the 108 handle.

USD/JPY News

US China trade deal propels US markets and yields higher and leaves dollar mixed

The US and China reached a limited trade deal on Friday a first step on the path to what both sides said could be a more comprehensive pact later in the year. President Trump said the countries reached a “very substantial phase one deal”.

Read more

Gold sellers cheer US-China trade optimism against all odds

With the US and China near to end the two-year-old trade tussle, Gold bears give little importance to doubts over soft Brexit and tension surrounding Syria while flashing $1,484.70 as a quote during Monday’s Asian session.

Gold News

Forex Majors

Cryptocurrencies

Signatures