(1) There is no need to panic. After the purchasing managers’ index for manufacturing came in below 50 on Monday there was some cause to worry about the health of the economy – but the rise in the services PMI, from 53.1 in April to 53.7, suggests that consumer demand is still there.
(2) The data builds on a picture of US growth shifting towards housing and the services sector, as sequestration cuts defence spending, and weakness in emerging markets puts a brake on industry. Steve Blitz at ITG Investment Research in New York puts it like this:
“The economy is going to grow off of expansion in services not manufacturing…In other words, health care and restaurants – all those retiring baby boomers spending their time visiting doctors and eating dinner at 4.30.”
(3) The news on employment is less encouraging. The jobs component of the services PMI fell from 52 to 50.1: the lowest since last July. It is worth a bit of caution – this sub-index has bounced around noisily between 50 and 55 for the last three years – but does suggest that today’s activity in the services sector is not turning into a lot of jobs.
(4) Nor does the ADP jobs report offer much cheer. The headline number of 135,000 for private job growth in May does not convey a lot of information and its value as a predictor of Friday’s official payrolls report is dubious. But the trend in the ADP figure has been steadily downward since last November. Analysts will probably trim their estimates for Friday. The current consensus is 159,000.
(5) For the Fed, the data point to a September tapering of QE3 rather than anything sooner. Nothing that we have seen is likely to change optimism about stronger growth later in the year and in 2014 and thus the need to taper. But especially given the Fed’s focus on the outlook for the labour market, there is enough uncertainty and weakness to want to wait through the summer, and not act prematurely.