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First Cut: May Kansas City Fed Services Composite Index off record low in April

The Kansas City Fed’s Services Survey reflected a sharp improvement in the general business activity index at -21 in May after the record low of -58 in April. The six-month outlook index climbed to -2 after -28 in the prior month. Survey respondents’ comments indicated that the Paycheck Protection Program had in many cases provided a lifeline to keep service businesses afloat and able to ramp back up when economic conditions are less restrictive. While activity is definitely consistent with a contraction, services have had time to think, adapt, and plan for the future.

While the index for revenues was a -21 in May, it was far better than the -81 in April. Employment contracted less sharply at -19 in May from -42 in April, and part-time employment was unchanged at -4. Declines in wages were slower at -6 in May from -22 in April. The workweek continued to contract at -15 but was better than the -34 in the prior month.

Credit conditions are no worse than they were in the prior month at -4 in May.

The index for input prices was up to 13 in May after -3 in April, in part on increased costs for things like personal protective equipment which is necessary for public-facing businesses. Pricing power remained weak with the selling prices index at -15 but above the -34 in April.

The Kansas City Fed services composite index has only a so-so correlation (0.446) with the ISM Non-Manufacturing Index. However, the reading does line up well with the performance of the other regional surveys of the service sector. The more upbeat tone hints that the ISM index will be up from the 41.8 in April when the May data is released at 10:00 ET on Wednesday, June 3.

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