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First Cut: Dallas Fed service sector conditions slip again in May

The general business conditions index in the Dallas Fed’s Texas Service Sector Outlook Survey slipped to -0.3 in May from 5.7 in April. While it is only narrowly below neutral, the index has been in negative territory for four of the past six months. The six-month expectations for business activity was 0.7 in May, down sharply from the 12.3 in April and the lowest since -0.2 in June 2016. The decline in perceptions of business conditions reflected the heightened uncertainty about the economy. That index rose to 19.3 in May from 12.8 in April and was the highest in the series’ short history.

The index for current revenues was down at 2.7 in May from 13.9 in May. Expected revenues also declined down to 27.7 from 41.3.

Businesses continued to hire, albeit at a slower pace, although increases in wages and benefits did not decline as much.

Input prices moderated a bit to 23.7 in May from 25.7 in April as energy costs fell further. The power to raise prices declined further as selling prices eased to 4.6 in May from 10.4 in April.

The Dallas Fed’s general business conditions index has a fairly solid correlation to the ISM Non-Manufacturing Index. Taken in combination with the sharp decrease in Richmond’s revenues for the service sector — the best correlation with the ISM number — signals potential for a downside surprise in the ISM report when it is released at 10:00 ET on Wednesday, June 5.

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