Armada Corporate Intelligence starts with the standard mantra uttered by economists when discussing the service sector in the US economy. It is large, very large, 80% of the GDP large and around 80% of the employment large. And highly varied – large and highly varied. This makes the service sector very important to the total US economy at the same time that it is hard to evaluate accurately. The service side of the economy includes high priced attorneys and neurosurgeons as well as the kid serving up fast food and the masseuse who tries to take the stress out of everybody else. The vast majority of us are service sector workers and this makes drawing general conclusions about this sector more than challenging. We never quite know what drives the shifts we see.
Analysis: The latest data from the Institute for Supply Management’s Purchasing Managers’ Index registered a steep and unexpected drop in the service sector reading. The level last month was a semi-respectable 55.5 and the expectation was that there would be a similar reading this month – around 55.0. Instead there was a steep decline to levels not seen 2010. A reading of 51.4 is still in the expansion zone but nowhere near comfortable. The analysts now shift to figuring out why. The fact that the manufacturing PMI also fell from previous heights suggests that there is something endemic in the economy that is causing the current stutter in the data.
There were several sections of the report showing weakness and that added to the levels of concern. The business activity index was at 60 in July and toppled to 52 this month while the new orders had a similar swoon. The employment index was already low at 51.4 but dropped further to 50.7. This all adds up to a slow economy, especially when one looks at all the other data that has been emerging of late. It is not that there has been a total collapse or even that the economy is suddenly in dire condition – what has happened is that overall growth has slowed.
There are three reasons suggested thus far but there are few that will assert that any one of these really explains what is going on. The first and most obvious is that there has been sufficient global market turmoil to take the edge off growth internationally and that has slowed the US as well. They look at the stall in Europe due to Brexit and the continued sluggish behavior of the Chinese economy. There is a second concern related to the US elections as the voter is more depressed than they have even been with the two choices available. The fear is that no matter who wins the President will be very weak for the next four years and that both parties will be busy undermining their own candidates as they seek to rebuild. Finally, there is the sense that consumers are not really in the game yet – despite the fact that retail numbers have been improving and there have been some improvements in consumer confidence.
Source: Armada Corporate Intelligence