The Kansas City Fed’s general business activity index for the service sector cooled to 6 in February from 14 in January. Survey respondents’ comments suggested that some is due to the impacts of COVID-19 that has affected trade and tourism with China. There were also indications that the halt in production of Boeing 737 MAX aircraft was creating ripples for the District’s service sector. The index for the six-month outlook was down somewhat to 23 in February from 28 in January but is still at a level that suggests service businesses in the District remain relatively optimistic about the near future.
The details in the report confirmed that conditions were a bit slower from the prior month. Sales revenues were down to 7 in February from 16 in January, but may be something of a pause after three months of solid expansion.
The lack of available skilled workers may be one reason for restraint in hiring, but increased uncertainty and cost consciousness may also have played a part in bring the index down to 6 in February after 13 in January. The workweek was a bit shorter but not enough to suggest any significant reduction in activity with an index reading of 20 after 22. What is notable is that the index for wages jumped to 34 in February after 29 in January, matching the series high of 34 in April 2014. Attracting and retaining workers is getting more expensive.
Input prices were down sharply to 22 in February from 33 in January and were probably due to moderation in energy costs. Selling prices were a bit softer at 20 after 22 and could be reflecting a necessity to raise prices to cover higher costs for tariffs and employee compensation.
The Kansas City measure does not correlate well with the ISM Non-Manufacturing Index. It’s modest decline in February probably does not presage a slower ISM number when it is reported at 10:00 ET on Wednesday, March 4. In any case, it is still consistent with at least middle growth in services.
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