Signs of a Pending Service Sector Slump
The news ain't gettin any better... A week after reporting its Manufacturing Index, the Institute for Supply Management (ISM) reported its Non-Manufacturing Index. The news was the same; the pace of economic expansion slowed in June, and we believe is an early indication of a trip back into recession.
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ISM Non-Manufacturing Index June 2010
Last week's data flow offered an ISM Manufacturing Report for June that reflected the slowest pace of sector expansion since December 2009. This week's economic data flow started off with ISM's Non-Manufacturing Report, and the news was similarly sinking. ISM's Non-Manufacturing Index fell in June to 53.8%, down from May's mark of 55.4%. While any reading above 50% is supposed to depict economic expansion, June's pace of growth was the slowest since February and seems to portend a backward slide in activity.
Looking at the component indexes, the Non-Manufacturing Business Activity Index decreased 3 percentage points to 58.1%, though it still reflected the seventh consecutive month of growth. We find the 2.7% decline in the New Orders Index, to 54.4%, most concerning because of what it says about future activity. Employment also fell, with that Index sitting 0.7% shorter than the prior month, and below 50 now at 49.7 percent. The Employment Index only just posted its first month of growth within the current recovery in May, but has now retrenched. The Prices Index decreased 6.8 percentage points to 53.8% in June; prices had been rising on increasing demand for services, which is expected in a growing economy and from the lows we touched. However, the rate slowed for this as well in June, and offers a signal into the mindset of service providers regarding future activity. In total, 15 non-manufacturing industries reported growth in June, and the respondents remained generally positive about business conditions. Still, those surveyed reflect our concerns about the burden of unemployment on the economic recovery.
According to ISM, "The 15 industries reporting growth in June based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Information; Mining; Accommodation & Food Services; Transportation & Warehousing; Wholesale Trade; Management of Companies & Support Services; Public Administration; Construction; Utilities; Health Care & Social Assistance; Retail Trade; and Professional, Scientific & Technical Services. The two industries reporting contraction in June are: Other Services and Finance & Insurance." It's unfortunate that the two laggards make up such an important part of our economy, and while ISM believes real estate and construction improved, we raise an eyebrow. We're sure the boost in recreation is simply due to weather, and that's likely impeded a bit by the Gulf oil spill. (Interests NYSE: MET, NYSE: LFC, NYSE: MFC, NYSE: PRU, NYSE: PUK, NYSE: SLF, NYSE: TOL, NYSE: HOV, NYSE: BZH, NYSE: DHI, NYSE: BAC, NYSE: JPM, NYSE: WFC, NYSE: C, NYSE: GS, NYSE: MS)
One Public Administration manager wrote, "Funding issues and cash flow issues continue to affect public sector procurement. Almost all capital acquisitions have been suspended." That pretty much sums up the public sector. Heck, Chris Christie just forced through the lightest New Jersey state budget in five years. He had to make massive spending cuts and disappointed a lot of public employees and users of services, but he avoided raising taxes too.
In any event, this change in the pace of expansion of the service sector can also be looked upon as a downward move in the chart line of activity. It's yet another sign that we may be moving into that second dip of recession. Remember what many economists and strategists seem to have forgotten, post-inventory restocking periods tend to take our economy back into or near economic contraction. Given the depth of this latest catastrophe, and the state we now find ourselves in with 9.5%+ unemployment, please tell me why so many gurus argue against double-dip recession. This is why you read Wall Street Greek. We've been writing about this possibility for nearly a year now, and yet most experts are only just moving into our camp.
The day's corporate news included Allen & Company's annual media conference. In attendance were Apple's (Nasdaq: AAPL) Steve Jobs and CEOs of Disney (NYSE: DIS) and Google (Nasdaq: GOOG). There were no earnings reports of significance to note in the US.
The Dow was up 0.6% today, and the day's best gainers included: Capitol Bancorp (NYSE: CBC), GSC Investment (NYSE: GNV), Blue Square Israel (NYSE: BSI), Omega Protein (NYSE: OME), E-TRACS USB Bloomberg Commodity (NYSE: UBM), Basic Energy Services (NYSE: BAS), BP (NYSE: BP), BankAtlantic Bancorp (NYSE: BBX), ProShares Ultra MSCI Europe (NYSE: UPV), Williams Coal Seamgas Royalty (NYSE: WTU), Direxion Daily Real Estate Bear (NYSE: DRV), General Steel (NYSE: GSI), Venoco (NYSE: VQ), E-House (China) (NYSE: EJ), ProShares Trust ProShares Ultra (NYSE: EFO), Mechel Steel (NYSE: MTL-P), Direxion Daily Emerging Markets (NYSE: EDC), Ternium SA (NYSE: TX), China Telecom (NYSE: CHA), Maxcom Telecomunicaciones (NYSE: MXT), JinkoSolar (NYSE: JKS), NexMed (Nasdaq: NEXMD), Nanophase Tech (Nasdaq: NANX), Broadwind Energy (Nasdaq: BWEN), The Dixie Group (Nasdaq: DXYN), Pressure Biosciences (Nasdaq: PBIO), Dataram (Nasdaq: DRAM), Williams Controls (Nasdaq: WMCO), United Security Bancshares (Nasdaq: UBFO), ADA-ES (Nasdaq: ADES), Jones Soda (Nasdaq: JSDA), TEL Offshore Trust (Nasdaq: TELOZ), Copernic (Nasdaq: CNIC), Logic Devices (Nasdaq: LOGC), New York Mortgage Trust (Nasdaq: NYMT), MTR Gaming (Nasdaq: MNTG), Power-One (Nasdaq: PWER), WCA Waste (Nasdaq: WCAA), Integral Systems (Nasdaq: ISYS), LightPath Tech (Nasdaq: LPTH), Adolor (Nasdaq: ADLR), Southcoast Fin'l (Nasdaq: SOCB), Innotrac (Nasdaq: INOC), B Communications (Nasdaq: BCOM), SeraCare Lifesciences (Nasdaq: SRLS).
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