Is the Service Sector in As Good Shape As It Seems?

The latest numbers from the Purchasing Managers’ Index (PMI) are causing some mixed reactions.

On the one hand the data was far more inspiring than was anticipated: The manufacturing index was above 50, and the service index came back with some numbers that stunned the analysts. The expectation was that there would be a small gain—something that would essentially match those seen in the manufacturing data. Instead, the service data for new orders increased from 53.7 to 57.7, a major gain by most any measure. But almost immediately after the statistics' release there were experts trying to add some perspective and calm down some of the reactions.

There are a couple of caveats when it comes to the improved service sector data. The first is that the jump seems to be the result of a great many reports of flat new orders as opposed to any significant increase in the orders themselves. The questions that are posed to the purchasing managers are simple—has there been more or less or have things stayed the same. This month the responses were overwhelmingly in the “stay the same” category. This made the index look pretty good and, in the great scheme of things, it is far better to see steady performance than it is to see weaker numbers. That said, the rise in the service sector new orders index does not signal a major increase in activity—just an absence of decline.

The other caveat is related to timing. This is the point in the year where there ought to be more activity given that the retail community is gearing up for the holidays. However, there may be more weakness in retail than originally expected, and that should be showing up in the PMI numbers as it has already manifested in the Credit Managers’ Index.

-Chris Kuehl, PhD., NACM economist

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