The ISM services index for April rose to 57.5 from 55.2 and that was 1.7 pts higher than expected and is almost back to the post election peak of 57.6 in February. It printed 54.6 in October. Positively, new orders rebounded by 4.3 pts to 63.2 to the highest level since August 2005 where 15 industries of 18 surveyed reported growth vs 13 in March. Backlogs were up by .5 pt to 53.5 after falling by 1 pt in March. Employment fell .2 pts and is barely above 50 at 51.4, the lowest since August and just half of those industries asked reported net hiring. Export orders (only some service companies report them) was higher by 3 pts to 65.5, the most since May 2007 as we’ve clearly seen a better overseas growth story. Overall, of the 18 industries surveyed, 16 saw growth vs 15 in March and the ISM said “Respondents’ comments are mostly positive about business conditions and the overall economy.”
Bottom line, we are going to get a Q2 economic rebound from the lame pace seen in Q1. The only obvious question is to what extent. After seeing softer ISM manufacturing and auto sales over the past 2 days for April, it was good to see upside in this key April report. The net result though is we believe the estimates for Q2 growth are too aggressive right now and will moderate as the quarter progresses mostly due to modest consumer spending and still capital spending uncertainty around the timing of tax policy. Exports and some inventory build should be a good lift to growth.
As for what Markit today said about its services PMI index for April, it was 53.1 vs 52.8 in March which was the slowest since September. It peaked at 55.6 post election in January. A few important things should be noted: “staffing levels rose at the slowest pace in nearly 7 years…input costs increased at a sharper rate, but competitive pressures meant that charges were raised to the weakest degree for 5 months.” This is otherwise known as margin pressure and this is the main reason given, “alongside a wide range of goods and services reported to have risen in price, panelists also commented on increased labor costs.” The underline is mine. Labor is taking a greater share of the profit pie after that percentage hit the lowest since WWII just a few years ago. That is great for employees and we’ll see for employers whether this margin hit continues or inflation rises via higher prices to offset higher costs.
Markit said April was “another month of relatively subdued growth in new business” but hopes for an improvement was evident as “over 34% of respondents are forecasting a rise in activity, with the overall degree of confidence the best in 3 months.”