April data highlighted a sustained recovery in overall business conditions across the U.S. service sector, led by faster growth of activity and incoming new work. However, the rate of job creation slipped down to its weakest so far in 2016 amid a lack of pressure on operating capacity and subdued confidence regarding the business outlook. At the same time, squeezed pricing power remained evident in April, with average tariffs broadly unchanged despite input cost inflation accelerating to its fastest since August 2015.
At 52.8 in April, up from 51.3 in March, the seasonally adjusted final Markit U.S. Services Business Activity Index remained above the neutral 50.0 value for the second month running. The latest reading was the highest since January and signalled a moderate expansion of service sector business activity. While the rate of output growth exceeded the average seen in the first quarter of 2016 (51.4), the headline index remained weaker than its post-crisis trend (55.6).
The final seasonally adjusted Markit U.S. Composite PMI™ Output Index picked up to 52.4 in April, from 51.3 in March, thereby signalling the fastest expansion of private sector output since January.
Stronger growth of service sector business activity (index at 52.8, up from 51.3 in March) contrasted with the weakest increase in U.S. manufacturing production for just over five-and-a-half years (index at 50.3 in April, down from 51.2).
Service providers mainly attributed the recent recovery in business activity to gradually improving client demand during April. Reflecting this, latest data indicated a modest rebound in new business growth from the survey-record low recorded in March. Anecdotal evidence suggested that uncertainty about the economic outlook was a key factor weighing on new order books at the start of the second quarter.
The latest survey highlighted that business confidence across the service economy was up fractionally in comparison to March, but still close to the lowest seen since the survey began in October 2009. Some survey respondents suggested that the presidential election season and heightened economic uncertainty had dampened the near-term growth outlook for their business units.
In contrast to the trend recorded for business activity and new work, the latest survey pointed to softer job creation at service sector companies. Moreover, the rate of employment growth was the weakest seen since December 2015. A slower rise in payroll numbers partly reflected an ongoing lack of pressure on operating capacity. Backlogs of work declined for the ninth consecutive month, which is the longest continuous period of depletion since the survey began in late-2009.
Service providers registered a renewed acceleration in input price inflation during April. Although only modest, the latest increase in average cost burdens was the fastest for eight months. However, average prices charged by service firms were broadly unchanged in April, which suggested further pressure on operating margins across the sector.
Commenting on the PMI data, Chris Williamson, Chief Economist at Markit said
The surveys are consistent with economic growth picking up from the 0.5% seen in the first quarter to a mere 1.0% at the start of the second quarter, suggesting the bounce-back from the weak start to the year is far from impressive.
The fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low seen in March, and optimism about the year ahead also remains close to a post-recession low.
The drop in confidence seen so far this year is beginning to hit the labour market, with the survey signalling 160,000 extra jobs being created in April, down from an average of 200,000 in the first three months of the year.