ISM’s non-manufacturing PMI in April beats estimates—non-manufacturing growth in the U.S. economy accelerates
The Institute for Supply Management (or ISM) released the services Purchasing Managers Index (or PMI) report for April on Monday, May 5. The services PMI reading for April was reported at 55.2%, which was ahead of consensus estimates of 54.2%. It was also higher than the 53.1% recorded in March. This was the 51st consecutive month in which the services sector activity expanded. The reading indicated that the U.S. services sector grew at an accelerating rate in April, largely due to the Business Activity Index, which increased substantially (7.5%) over March to come in at 60.9%. Agriculture, forestry, fishing, hunting, and construction led the list of industries reporting an increase in business activity.
Key highlights of the April services PMI release:
- Fourteen out of the 18 industries included in the survey reported growth in April, led by the arts and entertainment and recreation industries. Mining was first on the list of four industries that reported a contraction in April.
- New orders, new export orders, imports, prices, and inventories expanded at a faster pace compared to March. It was thought that the level of inventories was too high.
- Employment in the services sector increased at a slower pace, with the employment index coming in at 51.3% in April, which was down from 53.6% in March.
Two survey responses were particularly relevant for consumption in the U.S. economy:
- “Overall spending continues to trend upward, particularly for large dollar items, like vehicles and aircraft, as the state replenishes the fleet that was depleted during 2009–2013” (Survey respondent in Public Administration).
- “We are experiencing a pickup in sales, which has brought back a little optimism that we may have seen the floor, and things could be turning up. We are making investments to take advantage of the upswing to leverage as many sales options as possible” (Survey respondent in Retail Trade).
An improvement in services sector industries, especially in big–ticket items like cars and the entertainment and recreation industries, indicates that consumer sentiment is increasing. This is expected to benefit companies in the consumer discretionary sector like GAP (GAP), which is part of the S&P 500 Index (VOO). The Vanguard S&P 500 ETF (VOO) tracks the S&P 500 Index, which includes the 500 largest publicly listed corporations in the U.S. by market capitalization. An improvement in the services PMI would also benefit ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY), whose investments include restaurant chains like Yum! Brands (YUM).
An increase in business activity is usually followed by an increase in interest rates, all else equal. Investors can benefit from a rising rates environment by investing in ETFs like the VanEck Vectors Investment Grade Floating Rate ETF (FLTR), which invests in floating-rate bonds. To read more about floating-rate notes, please read the Market Realist series Why investors should look at floating rate notes as an option.
In the next section of this series, we’ll discuss the Markit services PMI release for April, which also released on Monday, May 5. Please continue reading.