Services index rises again, pointing to US recovery

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The U.S. services sector continues to display "green shoots," signs of modest improvement. This bodes well for the U.S. economy.

The Institute for Supply Management's Non-Manufacturing Index, also known as the services index, rose to 47.0 in June from 44.0 in May, the ISM announced Monday. Readings below 50 indicate a contraction; above 50, an expansion. Economists surveyed by Bloomberg News had expected the services index to total 46.7 in June.

What's more, the index's closely watched business activity component also rose for the second consecutive month, jumping 7.4 points to 49.8 in June from 42.4 in May.

Economists, executives, and market analysts closely monitor the business activity component of the services index because the survey does not contain a composite index, unlike the ISM's manufacturing index.

Still, despite signs of modest improvement in U.S. commercial conditions, Walter "Bucky" Hellwig, who helps manage $30 billion at Morgan Asset Management in Birmingham, Alabama, said executives should not look for earnings growth from employment increases in Q3/Q4.

"So long as unemployment keeps rising, the consumer will continue to be very conservative," Hellwig told Bloomberg News Monday. "Any improvement will come from cost cutting, and that's not sustainable. If you have no anticipation of top-line growth -- it will be a little tougher to generate that enthusiasm into the fourth quarter."

Survey participants see slowly improving business conditions

In June, respondents to the services survey said there were signs of improving business conditions, but that clients are still delaying capital spending decisions. In the accommodation and leisure sector, respondents said occupancy levels continue to increase at a slow pace. Regarding wholesale trade, survey participants said activity is still slow and little has changed since last month. Other respondents also remarked that the economy appears to be stabilizing and that the second half looks more positive than the first half.

Investors should monitor the ISM services index, due to the large role (60-65 percent of GDP) services play in the U.S. economy and trade, due to the transfer of many manufacturing operations to lower-cost plants abroad. The non-manufacturing index surveys about 400 firms in 60 sectors.

Economic Analysis: Both the ISM services index, and the manufacturing index, which rose to 44.8 in June from 42.8 in May, show signs of a slowing rate of contraction. Although still below 50, the level that demarcates expansion from contraction, each index has risen for two straight months. Provided each continues to rise, that would suggest the worst period of the recession is over and that we're entering a bottoming period and, more likely, an economic recovery. Further, businesses are starting to see an improvement in order flows and are issuing better and brighter outlook comments -- two other indicators that typically precede increases in aggregate demand.
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