The headline index in four of the five District Bank surveys for the service sector point to improved conditions in December. Activity in the service sector has managed to hold on to mildly expansionary conditions even as manufacturing has been in a mild recession since August. It has been less affected by the uncertainties associated with trade negotiations. In recent months it has benefited from the end of the government fiscal year on September 30 when contracts were signed and now is seeing a new round of end of calendar year agreements inked. However, that should not disguise that activity for 2019 overall is at a noticeably slower pace than 2018.
The ISM Non-Manufacturing Index for December will be released at 10:00 ET on Tuesday, January 7. This is the fourth business day of the month, not the third. The break in patter is due to the timing of the New Years holiday. Also, the annual revisions for the ISM service sector report should be released on Wednesday, January 29, one week in advance of the January report on Wednesday, February 5 at 10:00 ET.
The regional surveys of service sector conditions do not have a particularly strong correlation to the performance of the ISM Non-Manufacturing Index. The Philadelphia Fed’s Non-Manufacturing Index is quite weak (0.425) and the decline in the index to 13.4 in December from 20.7 in November should not raise much possibility of a downside surprise in the ISM report. Also, the month-over-month decline was more of a return to the underlying trend rather than a loss of momentum. Much the same can be said of the Kansas City Fed’s Composite Index for services (0.537) in terms of its predictive characteristics. However, the index was up to 16 in December after 10 in November. It is also running more-or-less on trend. The New York Fed’s service sector business activity index (0.648) has a loose correlation to the ISM index. It was essentially unchanged in December at 3.0 after 2.9 in November. Conditions have steadied at a slow pace of expansion.
The best correlations for the ISM Non-Manufacturing Index are with the Dallas Fed’s general business activity index which gained to 13.5 in December from 4.7 in November and was the strongest in over a year since 14.3 in October 2018. The Richmond Fed’s Survey of the Service Sector does not have an overall index. It’s revenues index (0.836) does tend to mirror the ISM index better than most of the other District Bank indexes. It rose a bit to 17 in December after 15 in November.
A comparison of the revenue indexes in the Dallas, Kansas City, and Philadelphia reports – New York does not have one – suggest that revenues are generally increasing modestly. If so, this is good news for the service sector which continues to be a source of new jobs and rising wages and benefits.
There is some room for an upside surprise in the ISM Non-Manufacturing Index for December when it is reported at 10:00 ET on Tuesday January 7. However, my read behind the month-to-month fluctuations in the regional numbers is that the ISM index will remain somewhere near the 53.9 of November which is consistent with the middling pace of growth that has characterized the second half of 2019.
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