US Service sector expansion eases in November, but activity remains robust

The Institute for Supply Management (ISM) non-manufacturing index declined by 3.2 points to 55.9 in November. The print was well below the consensus forecast, which called for the index to retreat to 58.0 from 59.1 posted in October.

Details of the report were nothing to write home about, with six out of ten subcomponents falling on the month. After posting robust gains in the prior month, both new orders (-4.5 points to 57.5) and business activity subcomponents (-4.8 points to 58.2) backtracked in November, but remained at elevated levels.

Coming on the heels of two consecutive monthly gains, the employment index also slipped in November, falling by 4.2 points to a still healthy 55.0.

Disinflationary pressures appeared to be diminishing, with prices paid subcomponent (+1.2 points to 50.3) rising for the second consecutive month and moving back into expansionary territory. 

Adjusting for seasonally (sa), backlog orders fell by 4 points to 51.1. Both export (-6.5 points to 48.0 (sa)) and import orders (-2.8 points to 50.0 (sa)) also deteriorated in November.  

Of the 18 non-manufacturing industries surveyed, 12 reported growth in November (up/down from 14 in the month prior). Industries reporting contracting activity in November were Mining; Arts & Recreation; Wholesale Trade; Utilities; Agriculture, Forestry, Fishing & Hunting; and Other Services.

Coming on the heels of a weak manufacturing report earlier this week, the ISM non-manufacturing index also disappointed, posting its biggest monthly decline since September 2013. It is clear that the non-manufacturing sector is not entirely immune to global headwinds, with the slowdown in the mining and wholesale trade industries being case in point. Moreover, slowing activity in manufacturing and energy sectors will weigh on consumer spending in states that are heavily reliant on these industries, ultimately trickling down to service industries.

However, unlike its manufacturing counterpart, which fell into contractionary territory, activity in the services sector continues to expand at a healthy clip. Most key subcomponents, such as new orders, business activity and employment are well above the 50-points threshold, which separates contraction from expansion.

The divergence in performance of two indexes illustrates the two-tracked nature of U.S. economic progress right now. Supported by robust domestic demand, most service sector industries continue to expand at a good clip. Meanwhile the factory sector is sputtering, faced with strong dollar, weak global growth and low energy prices. As a result, while narrowing slightly in November, the gap between the two indicators remains quite wide (at 7.3 points). 

"External headwinds and robust domestic demand were also discussed by Janet Yellen in her speech yesterday. From the Fed's standpoint, contaction in the manufacturing sector and moderate slowdown in the services industry are not game changers as far as the rate hike is concerned. But the headwinds that the economy is facing continue to support the case for a very gradual pace of interest rate normalization", notes TD Economics.