Service Sector Index Unchanged in April

The service sector held steady in April. The Institute for Supply Management's Non-Manufacturing Index, commonly known as the services index, was unchanged at 55.4. Readings above 50 indicate an expansion; below 50, a contraction.

Economists surveyed by Bloomberg News had expected the services index to rise to 56.4 in April from 55.4 in March. The index was as at 53.2 in February and at 50.5 in January. It hit a cycle low of 37.4 in November 2008.

The index's closely-watched business activity component inched higher to 60.3 in April from 60.0 in March. Only a modest rise in the component was expected in April, following March's 5.2-point surged to 60.0.

New Orders, Employment Measures Decline

Meanwhile, the new orders component did not fare as well, falling to 58.2 in April from 62.3 in March. Even so, the component is above the 50 expansion/contraction demarcation line.

Also, the employment component dipped to 49.5 in April from 49.8 in March. The employment component hit a low of 31.1 in November 2008.

In April, respondents to the services survey offered the following comments, by sector:

"Best production/service levels in 24 months" (wholesale trade sector). "Business conditions are improving." (management of companies and support services sector). "There are signs of improvement which are leading us to be optimistic; however, as prices escalate the stability of the recovery is at risk" (retail trade sector). "The market and other financial indicators point to an improving economy; however, that is being overshadowed by skepticism and lack of confidence. Capital spending is being constrained by concern over the economic view in a post-stimulus era, with double-digit interest rates and mounting debt" (educational services sector). "Selling prices for our products continue to decline" (mining sector).

Investors should monitor the ISM services index, due to the large role services play in the U.S. economy and trade, as a result of the transfer of many manufacturing operations to lower-cost plants abroad. The non-manufacturing survey polls about 400 firms in 60 sectors.

April's services sector report was a mixed-bag: the top-line index was flat, but it nevertheless remained at a level that indicates an expansion. As noted, the business activity component was expected to take a breather after March's large gain, so its small rise in April is not consequential. The report's major negative? The decline in the new orders component: the metric is an indicator of future demand, hence its decline in April may be indicative of a slow down in sector growth, if the component continues to decline in future months. That said, respondents comments remained generally favorable. For the most part, they paint a picture of improving services sector conditions, with increasing demand, but not robust conditions yet.