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Recap: Regional Surveys for the Service Sector for December 2018 finish year on a soft note

It is a bit of a mixed picture across the four District Bank surveys for the service sector. However, on net there appears to be potential for a downside surprise when the ISM Non-Manufacturing Index is released on Monday, January 7 at 10:00 ET.

Two of the four Districts saw their headline indexes plunge, one was down for a fourth straight month, and the fourth rose for a second month in a row, but only partially recovering from an earlier sharp decline.

The Philadelphia Non-Manufacturing Index dropped almost 40 points to 3.9 in December from 43.3 in November. This indicated activity was still positive as it has been since October 2012, but the reading was the lowest since 0.8 in February 2014. The Dallas Fed’s general business activity index fell to -5.0 in December from 11.4 in November and was the first negative reading since -5.2 in August 2016. The Philadelphia number does not have a particularly solid correlation to the ISM report (0.509), however, the Dallas number does (0.798).

The New York Fed’s business activity index dipped 3 points to 5.6 in December. This was not a notable decline but was down for a fourth month in a row and is a substantial decline from the near-term peak of 22.5 in September. On the other hand, the Richmond services level rose to 10 in December after 5 in November and -1 in October and retraced about half of the drop off since 18 in September. Of the District Bank surveys for services, the Richmond revenues has the best correlation to the ISM number (0.837), while New York’s is only moderate (0.654).

Given the variation across surveys for the service sector, it difficult to make too firm a prediction regarding the direction of the ISM Non-Manufacturing Index in December after the 60.7 in November. However, it seems likely the three-month string of 60+ readings could be broken in December.

Moreover, these numbers complement the broadly softer – in some places steeply softer – readings for the regional surveys for manufacturing. In turn, it suggests both sectors may be taking a pause to plan and adapt to more modest economic growth at home and abroad.

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