Why you need to look out for service purchasing managers’ indexes

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Dec. 4 2020, Updated 10:51 a.m. ET

Institute of Purchasing Management and Markit Intelligence Services PMI releases

Services consist of industries like banking, insurance, transportation, and scientific and technical services. The services sector accounts for almost 80% of the U.S. gross domestic product or GDP (Source: CIA). This makes the services sector the most important driver for economic growth. Economic growth is a major determinant of returns on both equity (SPY)(IVV) and fixed income (TLT) investments.

Each month, the Institute for Supply Management (or ISM) and Markit Intelligence release two different Purchasing Managers Index (or PMI) reports measuring growth trends in the services sector. The reports for August will release on Thursday, September 4.

The PMI is a composite measure of economic activity. It’s based on surveys of private-sector firms, selected on economic criteria like revenue contribution to industry sales. A reading of above 50 implies growth in the private services sector. A reading below 50 implies contraction.

Highlights from the July ISM PMI release

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  • The ISM-PMI reached its highest level ever in July, at 58.7%. The increase was led by growth in new orders and production. The pace of job creation was also higher.
  • Sixteen out of seventeen industries reported growth as per the ISM index.
  • Declines were reported in the export orders and inventories components.

Highlights from the July Markit PMI release

  • Markit’s services PMI dipped slightly in July, though the reading was still strong at 60.8. This was the second-highest reading ever.
  • A surge in factory production spurred the Markit PMI reading above the critical 50 level. However, new orders and employment growth slowed.
  • Markit’s release also reported lower business confidence and higher economic uncertainty among firms. This may put the brakes on growth in the coming months.

The services PMI releases are likely to impact ETFs like the PowerShares QQQ (QQQ), which tracks the tech-heavy Nasdaq-100 Index. The iShares S&P 100 Index ETF (OEF), which includes a large number of financial sector firms like JPMorgan and Citigroup, may also be affected.

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