If the US economy is ready for rate hikes starting June, you certainly would not ascertain that fact from the service sector PMI.
Today the flash reading shows service growth is the weakest since 2009, barely above contraction.
The Markit Flash U.S. Services PMI™ shows “Weak service sector growth persists in May, while business optimism eases to its lowest for over six-and-a-half years”.
Key Points
- Weakest rise in service sector activity for three months
- Service providers report slowest rate of staff hiring since December 2014
- Business optimism drops to its lowest recorded since the survey began in October 2009
Markit PMI Service Sector Activity
U.S. service providers indicated a sustained upturn in overall business activity during May, but the rate of expansion was only marginal and the weakest for three months. Survey respondents cited relatively subdued client demand and less favourable domestic economic conditions as key factors weighing on business activity in May.
The seasonally adjusted Markit Flash U.S. Services PMI™ Business Activity Index registered 51.2 in May, to remain above the crucial 50.0 no-change value for the third consecutive month. However, the index was down from 52.8 in April and much weaker than the long-run survey average (55.6).
In line with the trend for business activity, service providers also recorded a renewed slowdown in growth of incoming new work during May. The latest expansion of new business intakes was only modest and one of the weakest recorded since the survey began in late-2009. Some firms commented on a cyclical slowdown in investment spending and continued unwillingness among clients to commit to new projects.
Subdued demand also contributed to another reduction in backlogs of work across the service economy, with the rate of decline accelerating to its fastest for just over two years. At the same time, payroll numbers increased only marginally in May, which some firms attributed to heightened uncertainty about the outlook for client spending. Jobs growth has now slowed in three of the past four months, with the latest upturn the weakest since December 2014.
Markit US Composite PMI
The Markit composite PMI is a blend of the service PMI and the manufacturing PMI. It tracks GDP nicely.
Please see US Manufacturing PMI Declines First Time Since September 2009 for the latest manufacturing PMI numbers.
Comments from Chris Williamson, Chief Economist at Markit
- “A deterioration in the survey data for May deal a blow to hopes that the US economy will rebound in the second quarter after the dismal start to the year.”
- “Service sector growth has slowed in May to one of the weakest rates seen since 2009, and manufacturing is already in its steepest downturn since the recession.”
- “Having correctly forewarned of the near-stalling of the economy in the first quarter, the surveys are now pointing to just 0.7% annualised GDP growth in the second quarter, notwithstanding any sudden change in June.”
- “A deteriorating order book situation and waning business optimism have meanwhile led to a further pull-back in hiring as companies scaled down their expansion plans. The surveys are signalling a non-farm payroll rise of just 128,000 in May.”
- “With no sign of any growth rebound and the labour market cooling, only one of the Fed’s three tests for a June rate hike – rising price pressures – is passed according to the PMI data. However, with prices rising largely on the back of higher oil prices rather than a fundamental improvement in demand, it seems that even core inflationary pressures remain subdued.”
2nd Quarter GDP Estimates
- Atlanta Fed: 2.5% – updated tomorrow
- New York Fed: 1.7% – updated Friday
- Markit: 0.7% – updated today
I expect both the Fed models will jump tomorrow because of the Head-Shaking Increase in New Home Sales on May 24.
However, gaming the competing Fed models has been more than a bit problematic. For discussion, please see GDPNow 2.5%, NY Fed Nowcast 1.7%; Huge Discrepancies: Why?.
I have had talks with researchers from the Atlanta Fed and have them scheduled with the New York Fed. I expect to have an update later this week or next.
Mike “Mish” Shedlock
