The latest data from the ISM lends credence to recent speculation of a global economic slowdown that is decelerating faster than predicted. With concerning developments in the Eurozone as well as an international trade war still at play, the U.S. service sector hitting a 5-month low in activity does not bode well to many who are worried about the near economic future.
Key Takeaways
- The most recent reading of the Institute for Supply Management’s non-manufacturing index shows a drop from 60.7 to 57.6 compared to a forecast 59.6 which would have been a comparatively minuscule decline.
- The ISM manufacturing index also performed even more poorly recently with last week’s report indicating a huge drop to the lowest level since November 2016.
Service sector prices dipped 6.7% to 57.6% last month while employment dropped 2.1% to 56.3%. Last month’s reading is the lowest since July 2018.
The Non-Manufacturing PMI is taken from replies of more than 370 purchasing and supply executives in over 62 industries and aims to gain insight into outlook and activity in the service industry. A reading of 50 or above is considered growth, while anything less than that is viewed as a contraction. While the PMI continues to show growth, the decline is worse than predicted.
Perhaps not directly correlated and one is a leading and one a lagging indicator. But the ISM Manufacturing PMI overlaid on the US GDP growth rate over 5 years is visually arresting chart I would say. pic.twitter.com/O5aaiU7lY3
— DSinden Pepperstone (@DS_Pepperstone) January 3, 2019
Expert Outlook
Anthony Nieves, chairman of the ISM’s non-manufacturing business survey committee, took a relatively positive spin in commenting on the recent data.
“Conditions are still good,” said Nieves. “It’s a pullback, yes, it’s a cooling off, but it’s still a good operating rate of growth.”
“The decline in the headline index was driven primarily by supplier delivery times and business activity,” said Bloomberg economists Tim Mahedy and Cark Riccadonna. “Strength in new orders suggests that the activity index should rebound in the near term, while the downward move in supplier delivery times reflects an easing in supply constraints -- consistent with moderating activity in a sector that saw robust growth in 2018.”
Market Reaction
Gold is trading up today, which is not surprising – decline in the service and manufacturing industries are often bullish for gold and bearish for the USD. Interestingly, gold actually dipped from session highs as the report was released before ticking upwards a few hours later. Spot gold is trading at $1,288.28/oz and up 0.43%. February Futures are also trading higher today with a 0.30% increase at $1,289.60/oz.
