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First Cut: New York Fed service sector survey index turns negative in October, the first time since July 2017

The New York Fed’s Business Leaders Survey for October put the current business activity index at -4.3 after 4.9 in September and was the first negative reading since -0.7 in July 2017. The forward business activity index shrank to 2.2 in October from 11.7 in August and was the lowest since -1.2 in November 2012. It is reasonable to conclude that the the regional service sector is slipping into recession and that hopes of a rebound in future activity are limited.

The details of the report are consistent with the weakness in the business climate which remained in contraction for a second month at -14.8 in October after -15.6 in September. Employment continued to expand at 2.2 in October from 6.7 in the prior month. It is a shadow of what it has been in the past two years. This was the lowest reading since 1.7 in March 2014. Wages continued a firm pace of increases at 38.7 after 39.8, but are moving down from the near-term peak of 54.8 in March, if unevenly.

The index for prices paid was up to 43.0 in October from 38.9 in September, but remained comparatively low from last year. The prices received index slipped to 18.3 in October from 20.0 in September. It remained more-or-less in line with recent months and reflected the softer pricing power for service businesses as economic activity grew more sluggish.

The current business activity index doesn’t have the best correlation with the ISM Non-Manufacturing Index (0.648). However, this report hints that the decline in the ISM index to 52.6 in September may take another step or two toward contractionary territory when the data is released at 10:00 ET on Tuesday, November 5.

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