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On the radar: August service sector outlook weakens for six months from now

The service sector has generally fared better than manufacturing in the past year or so with a series of events that started with tariff policy in the spring of 2018 and have been exacerbated by further geopolitical developments and lack of resolution on trade issues with China and the US. Fears of a recession have increased, and with reason.

I would not make too much of one month’s data, but there is cause to take notice of the August numbers in the New York and Philadelphia surveys of service sector activity. If present conditions are still those of modest expansion, the outlook for six months from now is more worrisome.

The New York forward business activity index dipped to 25.0 in August from 28.4 in July. It was not a bad reading overall and is stronger than those seen in late 2018 and early 2019. However, the Philadelphia index for general business conditions in six months plunged to -0.7 in August from 21.8 in July and is the only negative reading in the series history other than the -6.2 in October 2011.

Earlier this year service sector activity took a hit from the partial federal government shutdown during a period in which contracts were not paid and/or signed. The rebound was quick, and expectations improved after the situation was resolved and disbursements caught up. However, service businesses are facing more doubts about the future in addition to greater uncertainty in the present.

Right now these are the only two regional reports for conditions in the service sector in August. Neither have a persuasive correlation with the ISM Non-Manufacturing Index that reflects national conditions. Next week will see the Tuesday release of the Richmond Fed’s Survey of the Service Sector at 10:00 ET and the Dallas Fed’s Texas Service Sector Outlook at 10:30 ET. Both of these reports are a better signal of the direction of activity for the non-manufacturing sector. It will be interesting to see if present conditions agree that activity remains modest-to-moderate, but also if confidence in the near-term outlook is deteriorating.

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