February data pointed to a fractional reduction in U.S. service sector business activity, which ended a 27-month period of sustained growth. At the same time, new business volumes expanded at the slowest rate since January 2015 and service providers were the least optimistic about their growth prospects for five-and-a-half years.
Survey respondents noted that heightened uncertainty about wider economic outlook, and reluctance among clients to commit to new projects, were factors that had weighed on their business sentiment.
Adjusted for seasonal influences, the final Markit U.S. Services Business Activity Index registered 49.7 in February, down from 53.2 in January and below the neutral 50.0 value for the first time in almost two-and-a-half years. As a result, the latest reading indicated the weakest service sector performance the government shutdown disrupted business activity in October 2013.
The seasonally adjusted final Markit U.S. Composite PMI™ Output Index posted 50.0 in February, thereby signalled that private sector output was unchanged over the month. Moreover, the index was down from 53.2 in January and the weakest recorded since October 2013.
While temporary disruptions related to heavy snowfall on the east coast was a factor weighing on the services index, anecdotal evidence from survey respondents also suggested that softer new business growth and concerns about the underlying economic outlook had placed downward pressure on business activity during February.
Growth of incoming new work has now eased for three consecutive months, with the latest upturn the weakest since the start of 2015. Although service providers pointed to generally supportive economic conditions, some reported more cautious spending patterns among clients and intense competition to secure new work. February data meanwhile indicated a further drop in unfinished work, with the rate of backlog depletion the fastest for almost two years.
Despite a slight drop in business activity and a softer expansion of incoming new work, the latest survey highlighted that job creation was sustained at a solid pace across the service economy. The rate of employment growth eased since January but was still slightly faster than the long-run survey average.
Overall input cost inflation remained moderate in February, which survey respondents widely linked to the influence of lower fuel prices. Meanwhile, prices charged by service providers decreased for the first time in five months, but at only a fractional pace.
Looking ahead, service providers’ optimism about the year-ahead business outlook dropped to its weakest since August 2010. Moreover, the latest reading was the joint-lowest since the survey began in October 2009.
The Composite Index of Nonmanufacturing Sector Business from the Institute for Supply Management (ISM) was little-changed at 53.4 during February versus an unrevised 53.5 in January. It was the lowest reading since February 2014. Consensus expectations had been for 53.1 in the Action Economics Forecast Survey.
Haver Analytics constructs a Composite Index using the nonmanufacturing ISM index and the ISM factory sector measure released Tuesday. It held steady m/m at 52.9, also the lowest level since February 2014. During the last ten years, there has been a 72% correlation between the index and the q/q change in real GDP.
Amongst the component series, the employment index declined sharply to 49.7, indicating a decline in jobs for the first time since February 2014. During the last ten years, there has been a 96% correlation between the employment index and the m/m change in service plus construction payrolls. The new orders index also fell to 55.5, its lowest point since March 2014. The supplier delivery index declined to 50.5, indicating a modest pick-up in delivery speeds. The rise in the business activity reading to 57.8 reversed much of the prior month’s decline, but left it well below the July 2015 high of 63.4.
The prices paid series remained below break-even for a second month as it fell to 45.5 from 46.4. Ten percent (NSA) of respondents paid higher prices while 17 percent paid less.
The export order series (NSA) reversed the prior month’s decline and jumped to 53.5. The imports series surged m/m to 55.5, the highest level since March 2015. The order backlog figure remained at 52.0, down from a high of 56.5 six months ago.