Headwinds to US service sector activity likely to be easing

In February, the US Institute for Supply Management's (ISM) non-manufacturing index was almost unchanged. It dropped slightly by 0.1 points to 53.4, better than consensus expectation of a drop to 53.1. There were mixed report for the underlying index. Only half of the index's ten subcomponents reported improvement in February.

Business activity recovered strongly in the month after falling sharply in January. It rebounded by 3.9 points to 57.8. Meanwhile, the inventories level grew 1 point to 52.5, while the sentiment towards the level of inventories also increases slightly for the surveyed businesses by 0.5 points to 62.

Indicators for international trade bolstered significantly, coming out of a contractionary territory.  Export orders grew to 53.5, growing by 8 points, whereas imports increase to 55.5, rising by 9.5 points. However, other indicators did not report encouraging results. The employment subcomponent entered contraction territory, falling 2.4 points to 49.7. New offers fell by 1 point to 55.5, whereas backlog of orders were unchanged in February. Prices paid subcomponent fell 0.9 points and continued to be in contractionary territory.

Out of the surveyed 18 non-manufacturing industries, 14 recorded growth, a slight rise from 10 in January, but remained unchanged from February 2015. Output in retail trade, entertainment and recreation, and mining contracted.

The ISM non-manufacturing index for February implies that headwinds to service sector activity might have started to ease. One of the easing headwinds is weak international demand that might be recovering due to the huger rise in export and import subcomponents. Both subcomponents are above their February 2015 levels.

A fall in the forward looking new orders subcomponent is disappointing; however, activity continues to expand at a good pace. However, employment sub-index is concerning that implies that employment might be facing certain weakness. The private service sector hiring pace has been slowing since October 2015.

Weakness continues to be there, mainly in supporting services and mining industries. However, the major chunk of service sector industries continues to perform well with the help of strong domestic demand and low input costs.

"Alongside the recent slew of better-than-expected indicators, including the ISM's manufacturing cousin, this morning's report helps cement our view that U.S. economy is finding its rhythm after the lackluster performance at the end of 2015", says TD Economics.