The Institute for Supply Management (ISM) non-manufacturing activity index rose from 55.5 to 57.3 last month, according to the latest report released on Wednesday. The reading indicates ongoing growth in services, beating the expectation of a slight drop to 54.9 for February. The report follows Tuesday’s surprise overnight interest rate cut, the first of its kind since the 2008 financial crisis.
Key Takeaways
- The ISM non-manufacturing index hit a yearly high of 57.3 vs. 54.9 expected.
- The report indicates underlying strength in the economy even in light of the recent virus outbreak concerns.
- The US Federal Reserve and Bank of Canada have introduced rate cuts to hedge against the effects of the outbreak.
The gains in the PMI were led by increased new orders, which rose from 56.2 to 63.1, and in employment, which rose from 53.1 to 55.6. Supplier deliveries rose from 51.7 to 52.4, and inventories increased from 46.5 to 53.9. Business activity growth slowed from 60.9 to 57.8, and prices rose at a slower pace than the month before. A gauge of employment hit a seven-month high, and a gauge of orders rose to the highest level since June 2018.
ISM Services spiked to a one-year high, much better than expected.
Remember, services make up about 2/3 of overall economic activity. pic.twitter.com/kpSVw20LeD
— Ryan Detrick, CMT (@RyanDetrick) March 4, 2020
16 non-manufacturing industries reported growth in February, with accommodation, food services, mining, finance, and real estate in particular all reporting gains. Entertainment and recreation declined, as did agriculture. Employment in services reportedly rose from 55.6 to 53.1, indicating ongoing growth in hiring.
“Most respondents are concerned about the coronavirus and its supply chain impact,” said ISM non-manufacturing survey chairman Anthony Nieves. “They also continue to have difficulty with labor resources. They do remain positive about business conditions and the overall economy.”
Coronavirus Impact on the US Economy
The Federal Reserve implemented the first emergency rate cut since the 2008 financial crisis on Tuesday, surprising and startling the financial markets. The rate cut was introduced to hedge against the rising recessionary pressure being generated by the coronavirus outbreak, which is expected to drag on US GDP in the first half of 2020.
The Fed cut interest rates by 50 basis points from 1.25% to 1%, with Fed chairman Jerome Powell saying “the coronavirus poses evolving risks to economic activity.” The outbreak has killed 3,000 people and resulted in over 700 million people being quarantined, impacted the wellbeing of people around the world as well as disrupting many supply chains and industries.
The virus could potentially interrupt the 11-year period of economic expansion in the US, the longest such period in history. Services in particular, could be impacted, with fewer people willing to travel or dine out.
Market Reaction
Gold prices have seen very strong gains throughout today’s session. Spot gold last traded at $1,640.74/oz, up 3.04%, with a high of $1,648.57/oz and a low of $1,628.13/oz. Prices have cooled off from earlier in the session, perhaps influenced by upbeat labor and service sector reports. However, the main factor influencing gold price is the recent rate cut. The Bank of Canada has followed suit, implementing a 50 basis point rate cut to 1.25% earlier today.
Senior CICB economist Avery Shenfield predicts another rate cut next month, saying “The Bank wisely concluded that whatever outlook they previously had for Canada had deteriorated meaningfully given the global slowing, the hit to commodity prices, and the inevitable hit to confidence domestically. A reasonable first step, with the Bank signaling that if things get worse, they are prepared to do more. Like the rest of us, they will be watching for news on both the virus and the economy, but it’s reasonable to assume a further 25 bp cut in April.”