Why the US service sector continues to expand very strongly

Surbhi Jain
August 8, 2014

Must-read: Consider the FOMC meeting and recent macro indicators (Part 8 of 8)

(Continued from Part 7)

PMI Services Index

The U.S. Services Purchasing Managers’ Index, or PMI, is a monthly service sector release from Markit Economics. It’s based on monthly surveys collected from over 400 U.S. companies.

The report provides a leading indication of what’s happening in the private-sector services economy. It’s calculated from seven components, including new business, employment, and business expectations. The index gives you a detailed look at the services sector, the pace of growth, and the direction of this sector.

 

The flash reading is based on approximately 85% of usual monthly replies. It’s usually released about a week before the final. It gives you an early reading of conditions for the current month.

PMI Services flash reading for July

The service sector in the U.S. continued to expand at a very strong rate, well above break-even 50 at 61.0 in Markit Economics’ flash reading for July. The index has averaged 55.61 index points from 2013 until 2014, reaching an all-time high of 61.20 index points this June. For July, there was a slowdown in hiring while backlog orders were being worked down.

Investors’ takeaway

The Markit Services PMI Flash provides advance insight into the services sector, which gives investors a better understanding of business conditions and valuable information about the economic backdrop of various markets.

Since the service sector accounts for more than three-quarters of U.S. GDP according to the World Bank, these reports have a significant influence on the markets. Service sector growth shows an increase in business activity, which signals economic growth. The stock market likes to see healthy economic growth because it translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy’s growing too quickly. Too-quick growth could cause inflationary pressures and erode the value of fixed income investments.

Popular consumer service exchange-traded funds or ETFs include the iShares U.S. Consumer Services ETF (IYC)—which has companies like the Walt Disney Company (DIS), Home Depot Inc. (HD), and Twenty-First Century Fox Inc. (FOXA) in its portfolio—and the Proshares Ultra Consumer Services ETF (UCC).

To learn more about the key takeaways from the July FOMC meeting, read our Market Realist series  Must know: Takeaways from the Fed’s July FOMC meeting .

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