US service sector cools off modestly in February

Activity in the US services sector slowed down slightly last month, albeit by less than most economists had forecast.

The Institute for Supply Management’s non-manufacturing purchasing managers’ index retreated from a reading of 53.5 in January to 53.4 in February - the lowest level in at least a year.

Nonetheless, that was better than the 53.1 which economists had penciled in.

The big disappointment is the slump in the employment index - Paul Ashworth

Successively higher readings above 50.0 indicate progressively quicker rates of expansion, with the opposite being true for prints below that threshold.

A sharp rise in a gauge of output levels in the sector, from 53.9 to 57.8, offset a slowdown in the pace at which companies received new orders, which fell from 56.5 to 55.5, and in hiring, from 52.1 to 49.7.

"The big disappointment is the slump in the employment index to a two-year low of 49.7, from 52.1. At first glance that is a concern because it leaves the index consistent with monthly gains in services payrolls of only 50,000 per month. But we’ve seen this happen with the employment index before," Paul Ashworth, chief economist at Capital Economics said in a research note sent to clients.

"Overall, it still appears that first-quarter economic growth will come in at a healthy 2.5% annualised. Given the signs of rising core inflation, that shouldn’t prevent the Fed from beginning to hike interest rates again in June," Ashworth added.

Gauges tracking firms' order backlogs and new export orders, on the other hand, both improved, as did a sub-index for imports.

Prices paid by service sector firms on the other hand declined at a faster rate, with the corresponding sub-index slipping from 46.4 to 45.5.

Comments from the survey respondents were mixed, with those from the health care telling the ISM that "overall business is increasing".

Their optimism was matched by that of purchasing managers from the information sector.

In mining, on the other hand, there were complaints about the hit to the industry on account of commodity pricing at over 12 year lows.

“This all points towards a sluggish recovery, and could lead the US central bank to lower its expectations on growth and inflation. It may also hold fire on an interest rate rise, at least for the time being.

“They say bad news comes in threes, and with non-farm payrolls announced tomorrow, economists are braced for further negative figures before the end of the week,” said Dennis de Jong, managing director at UFX.com.