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First Cut: Dallas Fed service sector activity improved in September, adds to outlook for modest performance at national level

The Dallas Fed’s general business activity index for the service sector was up to 6.3 in September after 0.2 in August and the highest since November 2018. Some of this may be a rebound after the softness in the prior month, but it suggested that the fundamentals are still for continued modest expansion. The six-month expectations index backed this up with a bounce to 6.2 in September after -4.0 in August. Some of the improvement may also reflect decreased uncertainty. That index declined to 15.4 in September from 19.6 in August, although it still points to fairly high levels of concern.

One sign that the headline index may overstate conditions is that full-time employment was down noticeably at 6.5 in September after 10.2 in August, and part-time employment barely expanded at 1.4 after 3.7.  The index for hours worked also pointed to a slowdown in the workweek at 2.4 after 8.2. Moreover, the pace of increases in wages and benefits fell to 14.1 in September after 20.0 in August and was the lowest since 12.3 in October 2016.

Input prices were slightly softer at 21.6 in September after 23.8 in August, while selling prices were up slightly to 2.5 after 1.5. The recent and brief run up in energy costs may not be as much of an issue as it was for manufacturing. The mild increase in selling prices does not suggest much pricing power.

The Dallas Fed general business conditions index has a decent correlation with the ISM Non-Manufacturing Index. The September gain is unlikely to be reflected at the national level when the ISM number is released at 10:00 ET on Thursday, October 3. However, it does suggest — along with the stronger correlation in Richmond Fed’s revenue index — that activity in the service sector may have continued to expand modestly after the 56.4 in August.

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