U.S. Service Sector

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Last month the service side of the U.S. economy expanded at its best pace since February. Analysts’ estimated the non-manufacturing index (NMI) would drop to be 55.4. But according to the Institute for Supply Management (ISM), the NMI was 56.9. Topping April’s NMI of 55.5, representing a two-and-a-half-year low. Last month the index of business production climbed 1.7 points to 61.2 and index of employment rose 4.4 points to 58.1, thus, these improvements point to the underlying strength of the service sector.

Service-oriented companies are optimistic, despite concerns over the shortage of skilled workers and trade tariffs. For the 112th consecutive month the non-manufacturing sector saw uninterrupted expansion. With the non-manufacturing industry accounting for roughly 90% of the economy, this continuous expansion indicates that the broader economy is on track for a steady growth this year. Due to weak reports on consumer outlays and housing activities, the economy lost momentum this year in the second quarter. But the service wing of the U.S. economy became a relief for this slow quarter. Furthermore, 16 of 18 non-manufacturing industries, including real estate, reported expansion last month. At the moment, investing in these non-manufacturing industries seems judicious.

Countering this increase in ISM’s service index was the decline in the firm’s survey of manufacturing, which reflects the widening split in the economy. The impending U.S. tariffs on goods imported from Mexico and the decline of trade relation between the U.S. and China has left many worried over the state of the economy. But the pick-up in new orders, coupled with the index for new orders increasing .5 points in May, suggests the service sector will continue to expand for the coming months.

Keith Knutsson from Integrale Advisors commented, “Despite the concerns over the economy, we should expect to see the service sector continue to expand through the remainder of the year.”

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