US economy

US services avoid aftershock from factory weakness

The vast US services economy continued to outshine factory activity to close out 2019, as growth in the sector hit its quickest pace in four months amid a deepening contraction for manufacturers.

The Institute for Supply Management said on Tuesday its non-manufacturing activity index rose to 55 in December, up from a reading of 53.9 per cent in the November survey and the strongest expansion since August. Economists polled by Reuters were looking for a smaller improvement to 54.5.

Anthony Nieves, chair of the ISM non-manufacturing business survey committee, said respondents were “positive about the potential resolution on tariffs”. Capacity constraints eased, while companies continued to report difficulty finding workers.

Sub-indices for employment and new orders showed slower growth month-to-month, while business activity surged to 57.2 from 51.6.

The services sector, which accounts for more than two-thirds of US economic activity, has held up despite weakness in a manufacturing sector that has come under pressure from trade uncertainty and softer demand.

Michael Pearce, senior US economist at Capital Economics, said the services sector’s rebound last month “should dispel any fears that the slump in the manufacturing index reported last week heralds a further economic slowdown.”

Mohamed El-Erian, chief economic adviser at Allianz, wrote in a tweet that the ISM’s services report “confirms the more general theme that is playing out in the US and even in Europe — that is, the global manufacturing slump hasn’t contaminated services.”

Factory orders were showing signs of sluggishness into the back half of the year, declining 0.7 per cent in November from the previous month and the lowest since September’s four-month low, according to government data released on Tuesday.

The reading was down from a 0.2 per cent increase, revised lower from 0.3 per cent in October, but came in slightly better than economists’ forecasts for a 0.8 per cent contraction in the penultimate month of 2019.

Transportation and defence purchases remained a drag on the manufacturing sector, and two focused readings from the Census Bureau that exclude each of those sectors showed factory orders were the same or better, respectively, in November than the previous month.

There were other signs of softness in today’s manufacturing data. Purchases of longer-lasting — or durable — goods shrank further in November, although those of shorter-term non-durable goods rose. Somewhat symptomatic of the reticence of dealers and final consumers to splash out on new equipment, inventories rose in November at a quicker pace than October and have been up in 11 of the past 12 months.

The report came after the ISM’s index tracking the manufacturing sector fell to a reading of 47.2 in December, its weakest since the financial crisis and keeping it below the threshold of 50 that separates expansion from contraction.

The manufacturing sector has been mired in a contraction since August, weighing on overall US economic growth that has otherwise benefited from strong employment, housing and consumer spending trends.

Economists at Oxford Economics noted that non-manufacturing activity “remained resilient” at the end of last year, adding: “A key risk to monitor is whether manufacturing weakness spills over into non-manufacturing activity.”

US stocks were down 0.2 per cent in recent trading, having pared their losses following the release of the services data.

The dollar index, which measures the greenback against global currencies, was up 0.3 per cent.


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