Sharp drop in US services PMI for April points to 6% fall in GDP

Services sector activity in the States declined at a pace consistent with a six a per cent drop in gross domestic product.

The Institute for Supply Management's non-manufacturing Purchasing Managers' Index fell from a reading of 52.5 for March to 41.8 in April (consensus: 37.5%).

Yet while the fall in the headline PMI was smaller than feared, Michael Pearce at Capital Economics was quick to point out that the drop would have been larger had it not been for the rise in a sub-index linked to suppliers' deliveries.

Unfortunately, the surge in that index from the 62.1 point level to 78.3 was the result of disruptions to supply chains and not bottlenecks due to excess demand.

That was clearly evident in the dramatic fall in the sub-index linked to output levels within the sector from 48.0 to a record low 26.0.

In itself, that sub-index pointed to a 13% decline in second quarter GDP.

A sub-index for new orders meanwhile collapsed from 52.9 to 32.9, while another tied to employment retreated from 47.0 to 30.0, with these two indices below levels last seen during the Great Financial Crisis.

Nevertheless, Pearce was surprised that the PMI had not revealed an even larger drop.

"After all, we already know that the widespread lockdowns in the second half of March led services consumption to fall by close to 10% that month," Pearce said.

"With most states closed for most of last month, we expect a similar decline again in April. All that suggests that, even if consumption begins to recover in May and June, second-quarter consumption and overall GDP growth will contract by close to 40% annualised, much larger than the falls implied by the latest surveys."

For his part, Ian Shepherdson at Pantheon Macroeconomics said: "In short, this is a terrible report, but no more terrible than is already obvious from the temporary closure of businesses due to the lockdowns.

"The May report should be less terrible, capturing the gradual re-openings now underway in about half the states."