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First Cut: Richmond Fed service sector revenues plunge in May

The Richmond Fed survey of service sector activity showed the measure for revenues fell to a barely positive 1 in May after 26 in April. The reading seems to be see-sawing between stronger and softer months of late, but this drop is significant. It may only be a correction after an exceptionally strong month in April. The outlook for revenue six months from now rose sharply to 41 in May from 33 in April and was the highest since 56 in September 2018. This may hint that while month-to-month revenues could be volatile, overall the outlook is stronger and positive.

Service sector businesses in the Richmond District continued to hire at a good clip in May (11 in May after 17 in April) and are paying higher wages (39 after 36) as workers with the right skillset are limited (-12 after -8).

Prices paid and prices received both reflected milder costs for energy. Prices paid also recovered a bit from the sharp upward move in March and April that was likely related to trade and tariffs. Prices received showed pricing power is fading, at least for the moment.

Among the regional surveys of the service sector, the Richmond Fed’s measure for revenue has the best correlation with the ISM Non-Manufacturing Index. The sharp decline in revenues in May would point to a weaker ISM index than the 55.5 in April when the numbers are released at 10:00 ET on Wednesday, June 5. However, the Dallas Fed’s index which also has a strong correlation points to a decidedly weaker number as well. This adds to the potential for a downside surprise in the national industry report.

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