Every month the Institute for Supply Management provides a detailed look at conditions in the broad-based service sector. The survey looks at a number of factors that make up these businesses in order to get a better feel for what’s what’s going on and what may happen in the largest part of the economy.
Like its cousin the ISM Manufacturing Index, a reading below 50 suggests service-oriented businesses are contracting while a reading above 50 signals expansion. However, it’s not just the level that’s important but the trend.
Released this morning, the ISM non-Manufacturing Index rose 2.9 points to 43.7 in April, topping expectations of a 1.2 rise, according to Bloomberg News and reaching its highest level since October. Though companies in the service sector are still indicating that activity is falling, the pace of the decline continues to slow.
More importantly, the new orders component in the index showed marked improvement. Employment also rose modestly but remains well below 50, signaling that businesses are reluctant to take on new employees.
Unfortunately, employment gains normally lag an economic recovery because businesses tend to be very cautious in ramping up hiring, making sure a rise in economic activity is permanent. Still, the data are the latest in a number of economic reports that suggest a bottom in activity may be near.
Bernanke cautiously optimistic
In his testimony on the economic outlook before the Joint Economic Committee in Washington, DC, Fed Chief Ben Bernanke said we are “likely to see further sizable job losses and increased unemployment in coming months,” echoing similar sentiment from the ISM survey.
But he noted that “recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing.” Bernanke added that activity is expected to “turn up later this year.”
The comments from the Fed chairman coincide with an improvement in consumer sentiment and an upturn in consumption spending in the first quarter.
With signs growing that 2009 will mark the end of the worst recession in over a half century, some pundits may warn that a new burst of inflation will greet 2010 because of the massive doses of monetary and fiscal stimulus still in the pipeline.
But Bernanke commented in his prepared remarks that he expects inflation will remain low given the slack in the economy and low cost pressure from oil and other commodities. However, he seemed to back away from fears about deflation, noting that stable inflation expectations should " limit further declines in inflation." Please see The deflation monster. If you have been following my remarks, this should come as no surprise.
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