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First Cut: Kansas City Fed service sector index hits a series low in March

The Kansas City Fed’s composite index for services decelerated to -16 in March after 6 in February and reached a low for the series history. The index for the six-month outlook also slammed on the brakes and was at -30 for March after 23 in February. The readings reflect the uncertainty around the spread of COVID-19 and what it will do to business activity in the near term as well as worries about what will happen if the necessity for social distancing is prolonged. Businesses are worried about keeping their employees and surviving until activity can resume.

Sales revenues dropped to -17 in March after 7 in February. Credit conditions were not much changed at -2 after -1. Plans for capital expenditures declined to -12 after 8.

The index for employees fell to -15 in March after 6 in February, although part-time employment — which was generally sluggish in recent months — only contracted slightly faster at -2 after -1. The upward pressure on wages nearly ceased at 1 in March after 34 in February. The workweek narrowed abruptly to -4 in March from 20 in February.

Input prices dipped to 17 in March from 22 in February, following declining costs for energy products. Selling prices were down to -4 after 20 with pricing power gone along with activity.

The Kansas City composite services index has only a so-so correlation with the ISM Non-Manufacturing Index (0.446) and in itself wouldn’t necessarily signal a decline in service sector activity at the national level after a 57.3 reading in February. However, so far the four District Bank surveys for the service sector in March have all seen precipitous falls that are consistent with anecdotal evidence about services shutting down due to warnings about the pandemic and efforts to limit the spread.

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