US domestic demand to remain supportive of economy, consumer spending likely to grow strongly

The ISM’s non-manufacturing index for the US rose slightly to 54.5 in March, as compared with consensus expectation of a rise to 54.2. The headline print was at 53.4 in February. Delving into details, seven of the ten subcomponents of the index rebounded in March. Business activity, after growing sharply in February, expanded further in March by 2 points to 59.8. The employment subcomponent rose 0.6 points to 50.3, rising for the first time in three months. New orders also rose for the first time in three months, rising by 1.2 points to 56.7.

The subcomponent of prices paid rose 3.6 points, but continued to stay in the contractionary territory. Meanwhile, the rebounding global backdrop assisted in boosting exports. Export orders subcomponent rose for the second continuous month by 5 points to 58.5. Imports dropped 2.5 points to 53. This was the only subcomponent that registered a drop in March. Out of the total 18 non-manufacturing industries surveyed, 12 registered growth.

Activity recovered in both service and manufacturing sectors in the US in March. The non-manufacturing index rose for the first time in five months, implying that headwinds are beginning to subside and that domestic economy is gaining traction, according to TD Economics. Weak external demand is one of the subsiding headwinds that might be recovering given the rebound in global PMI indexes in March and large gains in export subcomponent.

A slight depreciation of the USD has also given a moderate tailwind, added TD Economics. Moreover, domestic demand is also likely to remain very supportive. In the beginning of 2016, consumer spending was weak due to drop in equity markets and unusual weather patterns, but the view on consumer spending continues to be positive, noted TD Economics. Underpinned by strong job gains, accumulated savings and diminishing slack in the labor market, consumer spending is expected to grow strongly. Furthermore, diminished financial markets volatility will help regain consumer confidence, added TD Economics.