The Econoday service sector activity index (ESSAI)* for April is minus 2.5 after minus 4.1 in March and minus 6.4 in February. Three of the Fed district bank surveys for the service sector show an increase in activity, two are down, and one is unchanged. However, three of the surveys are consistent with modest contraction in activity and those showing expansion are only for mild growth. Economic uncertainty associated with the geopolitical situation and the lengthening war on Iran is keeping growth in services in check.
The service sectors in New York and Philadelphia improved in April but remain in contraction. Chicago’s tepid growth was little changed with only a small improvement while activity in Richmond is flat, if positive. Conditions worsened for Dallas’ shrinking service sector and Kansas City’s retreated to just above the neutral mark.
Particularly concerning to the service sector is rising energy prices. The impact is immediate for many services and difficult to absorb in the short term. Over the medium term, further prices can pass through from the producer level making price pressures more persistent. The Econoday service sector prices paid index (ESSPPI) is up to 40.5 in April from 35.2 in March and 32.4 in February. The April ESSPPI is the highest since early 2023 and hints that progress in disinflation for non-housing services is stalling. Which is bad news for potential rate cuts from the Federal Reserve.
The ESSAI has good correlations** with the major national indexes for activity in the service sector.
The S&P services purchasing managers index had a flash reading of 51.3 for April, up slightly from the final 49.8 in March and just below 51.7 in February. The index generally sees only minor revisions from the flash to the final report. The S&P index is taken later than the regional surveys and is likely the more accurate perception of current conditions for the service sector.
The final S&P services purchasing managers index for April is set for release at 9:45 ET on Tuesday, May 5.
The ISM services index was lower at 54.0 in March from 56.1 in February as consumers reacted to higher prices for energy with cutting back on discretionary spending. The ISM measure is likely to lose more ground in April.
The ISM services index for April is set for release at 10:00 ET on Tuesday, May 5.
*The ESSAI is an average of seasonally adjusted indexes from the Federal Reserve district bank surveys of the non-manufacturing sector. The districts correspond with about 48 percent of the US labor force. An index above 0 indicates expanding activity and below 0 indicates contracting activity.
**S&P PMI for services index correlation 0.702, ISM services index 0.747.
