Global Daily – US service sector takes a hit

by: Maritza Cabezas

• US service sector shrinks slightly in February…
• … adding to concerns of spillovers from weak manufacturing activity
• Meanwhile, picture of US housing market remains robust at the start of the year
• We expect the housing market to continue showing a gradual recovery…
• …although risks are to the downside
• Increased uncertainty about US economy supports our view that the Fed will not hike again in 2016



Global-Daily-Insight-25-February-1.pdf (65 KB)

Weak US service sector shrinks slightly in February…

The Markit Flash US service PMI declined to 49.8 in February from 53.2 the previous month. This fall brings it to levels similar to October 2013 when the US government shutdown occurred. Although this index is preliminary and is based on 85% of usual monthly replies, survey respondents largely suggested that softer underlying new order growth and uncertainty about the economic outlook were weighing on business activity, as well as disruptions related to the heavy snowfall in the east coast.


… adding to concerns of spillovers from manufacturing activity

The service sector has been a bright spot of the US economy, but this weak report suggests that services could be feeling the pain of the persistent slowdown in US manufacturing. The service sector represents around 80% of the economy and accounts for a large part of US employment. Strong employment has allowed consumption growth to offset the weakness in the manufacturing and energy sectors. February’s consumer confidence from the Conference Board released on Tuesday showed that a negative trend in expectations is developing among consumers over the past few months. This will likely be an additional concern for Fed authorities. At current levels, the service PMI suggests that GDP growth will slow down considerably this quarter. Overall this supports our view that the Fed will not raise interest rates again in 2016.


Start of 2016 shows housing market tightening further

Other reports released in the past few days show that the US housing market indicators are now closer to more normal levels. January’s existing home sales, released on Tuesday, showed that the demand for homes reached the highest level since early 2007. Existing homes, which account for more than 90% of the residential market, are now nearing historical lows. First time home buyers accounted for around 32% of all purchases, up from 27% a year earlier. This could be an early sign that the decline in homeownership is bottoming. As for new home sales released on Wednesday, these declined to the lowest level in three months, partly as a result of payback for considerably strong demand of new homes in December.


Meanwhile, the supply of homes unexpectedly cooled in January. Housing starts fell to the weakest level in three months. Moreover, home permits were practically unchanged, after contracting in December. This is a disappointment for housing starts in the coming months, since housing starts historically track housing permits. The housing supply and demand imbalances have resulted in a tighter housing market. Indeed, the latest Case Schiller House Price Index rose by 5.7% yoy, edging down from 5.8% yoy the previous month.


US housing market to continue showing a gradual recovery

We think that the decline in inventory of new and existing homes will be supportive for residential investment this year and as a result for GDP growth. There are, however, downside risks. The home builder’s survey declined slightly in January and February, albeit from considerably high levels, Meanwhile, a weaker service sector could affect employment demand. Although we expect the labour market to slow down this year, it should remain resilient enough to continue supporting housing demand.


25 feb