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Will non-manufacturing indicators show strong business activity?

Surbhi Jain

Watch for these key indicators ahead of the July 4th weekend (Part 4 of 8)

(Continued from Part 3)

PMI Services Index

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 U.S. Services PMI increased to 61.20 index points in June from 58.10 index points in May. The index has averaged 55.61 index points from 2013 until 2014, reaching an all-time high of 61.20 index points this June.

ISM non-manufacturing Index

The Institute for Supply Management surveys more than 375 firms from several sectors across the U.S., including agriculture, mining, construction, transportation, communications, wholesale trade, and retail trade. It surveys companies monthly to arrive at the ISM non-manufacturing composite index. The index includes four equally weighted components:

  1. Business activity (closely related to a production index)
  2. New orders
  3. Employment
  4. Supplier deliveries

For the composite index, a reading above 50 shows that the non-manufacturing economy is generally expanding. A reading below 50 shows that it’s generally contracting. For May, the composite index rose to 56.3 versus April’s 55.2. Business activity as well as growth in new orders were exceptionally strong. Growth in employment, however, lagged. The reading for June is scheduled for Thursday, July 3.

Investors’ takeaway

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 is growing too quickly. Too-quick growth could cause inflationary pressures and erode the value of fixed income investments.

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). These ETFs serve as good indicators for the industrial sector.

While the service sector holds its share of importance in the U.S. economy, the real estate sector is one of the most popular sectors among the investing community. This is especially true after the housing bubble of 2008–2009, which took the U.S. economy into the Great Recession. The U.S. economy so far still struggles to recover completely from its 2009 lows. The next part of this series sheds light on the key releases from the real estate sector that are due in the week ahead.

To understand the effect PMI readings have on markets, please read Why do key purchasing managers’ index readings move markets?

Continue to Part 5

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