U.S. service providers signalled a modest rebound in business activity and robust employment growth during March. However, incoming new business expanded at the slowest pace since the survey began in October 2009, which also contributed to a fall in business confidence to a survey-record low. Meanwhile, input cost inflation remained subdued in March and prices changed by service sector companies increased at only a marginal pace.
The seasonally adjusted final Markit U.S. Services Business Activity Index registered 51.3 in March, up from 49.7 in February and back above the crucial 50.0 no-change value. Nonetheless, the latest reading was still the second-lowest since October 2013 and pointed to only a marginal upturn in service sector output.
Moreover, the average for the first quarter of 2016 (51.4) signalled the weakest expansion of business activity since Q3 2012.
Adjusted for seasonal influences, the final Markit U.S. Composite PMI™ Output Index registered 51.3 in March, up from 50.0 in February, to signal a return to growth for overall U.S. private sector activity. However, the average index reading in Q1 2016 (51.5) was the weakest seen for any quarter since Q3 2012 (51.3).
Survey respondents noted that subdued growth of incoming new work persisted in March. The latest expansion of new business volumes was only marginal and the weakest in six-and-a-half years of data collection. Anecdotal evidence suggested that uncertainty about the economic outlook and cautious spending patterns among clients continued to hold back new business growth across the service sector.
Softer growth of incoming new business resulted in another reduction in backlogs of work during March. Work-in-hand (but not yet completed) has now fallen for eight months running, which firms mainly linked to a lack of pressure on operating capacity at their business units. However, service providers boosted their payroll numbers, which continued the upward trend seen in each month since March 2010. Companies that reported a rise in their staffing levels mainly commented on the launch of new products and long-term business expansion plans.
Meanwhile, input cost inflation remained subdued across the service sector in March. Survey respondents noted that lower fuel prices had helped to offset higher costs elsewhere, particularly staff salaries. At the same time, average prices charged by service providers increased only marginally, reflecting strong competition for new work and slower cost inflation than in February.
Service providers indicated sustained optimism (on balance) about the year-ahead business outlook in March. However, the degree of positive sentiment moderated for the second month running and was the lowest since the survey began in late-2009, reflecting heightened economic uncertainty and softer new business growth in recent months.
The NMI® registered 54.5 percent in March, 1.1 percentage points higher than the February reading of 53.4 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased to 59.8 percent, 2 percentage points higher than the February reading of 57.8 percent, reflecting growth for the 80th consecutive month, with a faster rate in March.
The New Orders Index registered 56.7 percent, 1.2 percentage points higher than the reading of 55.5 percent in February. The Employment Index increased 0.6 percentage point to 50.3 percent from the February reading of 49.7 percent and indicates growth after a month of contraction. The Prices Index increased 3.6 percentage points from the February reading of 45.5 percent to 49.1 percent, indicating prices decreased in March for the fifth time in the last seven months.
According to the NMI®, 12 non-manufacturing industries reported growth in March. The majority of respondents’ comments indicate that business conditions are mostly positive and that the economy is stable and will continue on a course of slow, steady growth
Doug Short has the charts:
Unlike its much older kin, the ISM Manufacturing Series, there is relatively little history for ISM’s Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.
The more interesting and useful subcomponent is the Non-Manufacturing Business Activity Index. The latest data point at 59.8 percent is up from a seasonally adjusted 57.8 the previous month.
For a diffusion index, this can be an extremely volatile indicator, hence the addition of a six-month moving average to help us visualizing the short-term trends.