DJ BIG PICTURE: Services Look Weak, But Not Double Dippy
By John McAuley
Of DOW JONES NEWSWIRES
05 Aug 15:13
NEW YORK (Dow Jones)--The services sector can be praised with fainter damns
than those reserved for the factory sector.
The service sector doesn't look as badly unsettled as the manufacturing
sector, but it's not exactly flourishing and there's at least a danger that it
could accompany or follow the factory sector to a more pervasive bout of
weakness.
For now, however, the risk of the much-feared double dip emerging seems to be
held at bay, if only barely.
The Institute for Supply Management's report on manufacturing, released last
Thursday, showed a steep 5.7 point decline to 50.5 and on Monday, the ISM
reported that the business activity index for non-manufacturing declined by 4.1
points to 53.1.
In each case, the index remained above the threshold of 50 that separates an
increase in the sector from an outright decline in sectoral activity. But the
decelerating rate of increase - the way the decline in the index really has to
be looked at - was disconcerting and raised concerns that the next reading
could show a fall below 50.
The two measures differ from each other in a more fundamental way.
The manufacturing purchasing managers index is a weighted composite of five
component indexes: new orders (30% weight), production (25%), employment (20%),
supplier deliveries (15%), and inventories (10%).
By contrast, the non-manufacturing business activity index is a separately
asked question in the survey, rather than a composite index.
Lou Crandall, chief economist at Wrightson Associates computes an
"alternative composite non-manufacturing index using the same weighting as in
the manufacturing report and substituting the business activity index for
production."
That basis shows a decline as well, but a smaller one. This proxy for the PMI
moved down to 51.3 in July from 53.0 in June and a peak of 54.6 in May.
Crandall points out that all of "these readings are consistent with
moderately positive growth." Indeed, he believes that the economy "hit an air
pocket" in July and that there will be slow growth, but growth nonetheless, in
the second half of the year.
Indeed, that sentiment echoes a comment made by Ralph Kauffman, chair of the
ISM non-manufacturing business survey committee in a telephone conference after
the release of the report "with the growth slowdown in recent months, the mood
of many of our members has turned more cautious. It reflects a change in our
members' perception of the economic outlook through year end."
The ISM non-manufacturing report is often scrutinized by economists to get
some insight into the employment report, but this month the employment report
was released last Friday and, in fact, showed a stronger service sector
performance than the ISM report showed.
According to the jobs report, there were 62,000 new private service sector
jobs created in July, but the ISM non-manufacturing report showed that
employment was still declining in July, albeit at a slower pace. The reading of
45.8 for July was 1.5 percentage points above June's reading, but still well
below the reading of 50 that indicates unchanged employment
"It shows a serious loss of momentum," said Ian Morris, chief economist at
HSBC Securities, "but I don't think it signals a double dip."
For one thing, Morris believes that auto sales in July were so strong that
"no matter how you crunch the numbers, it's difficult to come up with
consumption growth much less than a 3% annual rate. That suggests that gross
domestic product will grow at a 2% to 3% rate. I can't see a double dip with
these data."
-By John McAuley, Dow Jones Newswire, 201-938-4425; john.mcauley@dowjones.com
(END) DOW JONES NEWS 08-05-02
03:13 PM |
