Service Sector Expansion Stays on Track


It's a case in which Wall Street will likely view the status quo as just fine: The Institute for Supply Management Non-Manufacturing Index, also known as the services index, was unchanged at 55.4 in May, but the reading nevertheless means the sector expanded for the fifth straight month.

Index levels above 50 signal an expansion; below 50, a contraction. A Bloomberg survey had expected the services index to rise to 55.9 in May.

Equally significant, two of three key components of the index rose in May, and all three continued to signal an expansion.

The index's closely-watched business activity component rose to 61.1 in May from 60.3 in April. Meanwhile, the new orders component declined to 57.1 from 58.2.

Services Sector Now Adding Employees

In addition, the employment component rose to 50.4 from 49.5 -- and that above-50 level signals that services employment is growing -- the first time the sector has shown employment growth in 28 months.

Given the large role services play in the U.S. economy, the employee growth reading also suggests that May's non-farm payroll report, to be released by the Labor Department Friday, is likely to be strong. The Bloomberg News survey estimates that the U.S. economy added 540,000 jobs in May. However, strong service sector conditions don't guarantee a large monthly job gain for the nation as a whole.

Factory Data Also Signaling Growth

Separately, the nation continued to show a rebound in manufacturing, as factory orders increased 1.2% in April following a revised 1.7% increase in March, the U.S. Commerce Department announced Thursday. Further, the inventory-to-sales ratio, although unchanged at 1.24 in May, remains at its lowest level in about 2 years, which suggests that demand continues to outstrip supply -- another bullish sign for the U.S. economic expansion.

Returning to the ISM report, services sector survey comments in May speak to both improved business conditions and a more upbeat outlook. The non-manufacturing survey polls about 400 firms in 60 sectors.

"Our business continues to grow. We are significantly above last year's pace" (information sector). "Customers' activity is improving in some parts of the country" (wholesale trade sector). "Outlook is still generally flat for the remainder of this year, with signs that orders and activity will be picking up" (professional, scientific, and technical services sector). "Continuing our pattern of cautious optimism. Consumers appear to be coming out of hibernation and willing to spend. We expect that if this trend can remain solid, we'll in turn spend additional dollars to support and drive sales activities" (retail trade sector).

A Broad-Based Recovery

May's services and April's factory orders data confirm a recovery in both sectors, and are further evidence of an ongoing U.S. economic expansion. The U.S. recovery is strengthening, and it will take more than a bump in the road in one sector to interrupt the journey.

But the key factor in the report is the shift in the services index's employment component to growing from contracting status, a change that should gladden the hearts of economists, business executives, investors and job seekers alike: It suggests service business will add employees in the months ahead, and serve as another positive contributor to monthly job figures -- part of the employment surge that will be the final piece in the economic-recovery puzzle.