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PMI Services Flash: Why the growth is slowest since October 2013

A recovering economy: What does the manufacturing sector promise? (Part 5 of 7)

(Continued from Part 4)

The services sector

According to the World Bank and Central Intelligence Agency’s World Fact-book (2013 estimate), services sector accounts for about 79% of the U.S. GDP, with manufacturing accounting for close to 13%. So, the state and growth rate of the services sector of the economy is an important determinant of the overall growth and eventually consumer confidence, in the economy.

The Purchasing Managers’ Index (or PMI) U.S. Services Flash is a monthly services sector indicator released by Markit Economics. The index is based on data collected from over 400 U.S. companies on leading indicators governing the services sector. The index is composed of seven components, including new business, employment, and business expectations. The flash index is released a week prior to the final PMI index and attempts to give a preliminary view of the condition of the services sector.

With the onset of spring, one would have expected the index level to rise after the cold winters. However, the growth in the services sector slowed in April, recording 54.2 flash level compared to 55.5 flash and final readings for March.

Investors’ takeaway

The Markit PMI Services Flash gives a detailed look at the services sector, the pace of growth and the direction of this sector. Since the services sector accounts for more than three-fourth of the U.S. GDP, this report has a significant influence on the markets. Plus, its sub-indexes provide a picture for new business, employment, business expectations, and prices.

Stock market investors like to see healthy growth in the services sector, as it indicates growing economic activity, and ultimately, higher corporate profits. This means that shareholders can expect a higher stock price and higher returns.

Fixed income investors, on the other hand, watch for inflationary pressures. Bond investors prefer moderate growth, as high growth is usually accompanied by inflation. Inflation causes interest rates to rise. So, existing bondholders see their fixed interest payments diminishing in value with the higher return that the market starts to pay.

For ETF investors, the performance of popular ETFs like the iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC), which has companies like the Walt Disney Company (DIS) and Amazon (AMZN) in its portfolio, the ProShares Ultra Consumer Services (UCC), and the ProShares UltraShort Consumer Services (SCC) also serve as good indicators with respect to the consumer services sector.

A major task for the policymakers post the 2008-2009 crisis has been to recover the shaken consumer confidence in the U.S. economy. With the economy showing improvement, consumer confidence has also moved into favorable territory. Read the next part of this series to see how the consumer confidence has improved, as indicated by certain key economic indicator releases.

Continue to Part 6

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