What people say and what they do are often different things. Investors got that reminder Monday.
The Institute for Supply Management said activity across the services sector, everything from hotels and restaurants to finance, grew in June after two consecutive months of decline. The ISM’s non-manufacturing index, based on a survey of service-sector businesses across the country, jumped to 57.1 from 45.4 in May—its biggest month-over-month increase since the series launched in 1997. The result was far better than the reading of 50 economists polled by FactSet predicted.
The report helped support a rally in stocks Monday. Midday, the S&P 500 and Dow Jones Industrial Average were each up 1.3%.
On one hand, the services-sector reading is the latest sign that the worst of the economic pain caused by the coronavirus pandemic is over, with activity springing back as businesses reopen and rehire. Some of the details in the report, such as a significant improvement in new orders that reflects recovering customer demand, are encouraging. On the other hand, it’s a reminder of how long a road it will be to fully recover—especially as a renewed rise in infections slow or reverse reopening plans in some states.
Jefferies economists Thomas Simons and Aneta Markowska say investors should interpret Monday’s services-sector news in the right context. “With broad-based reopenings and a very low bar set by the readings of the past two months, we saw a very solid rebound,” they say. But the index, like all diffusion indexes, measures breadth of improvement—not depth. “It is difficult to imagine a deterioration in activity below ‘lockdown,’ ” Simons and Markowska say, “so the reopening of economies around the country naturally produced a strong reading.”
Moreover, the report shows ongoing weakness in services-sector employment. The employment component of the June non-manufacturing survey shows payrolls continue to contract, highlighting the gap between improving business sentiment and the willingness to act on it. The June jobs report released Friday by the Labor Department similarly showed how far the services sector has to go to get back to normal. More than 10 million of the sector’s employees remain out of work versus a year earlier, despite the hiring of 4.3 million last month.
The Jefferies economists say the lagging improvement in hiring, despite rising optimism executives are expressing, could be the consequence of a handful of factors. Businesses are cautious about bringing back workers until they’re more confident that future activity levels will be sustained; workers may be reluctant to return because of ongoing health concerns and the enhanced unemployment benefits that are in some cases are paying more than low-wage jobs; some companies aren’t bringing back all their employees because they’re operating in ways that require fewer staff; and second-order effects are prompting larger firms to lay off workers, negating the effects of small businesses bring back furloughed workers.
Regardless of which factors are holding back employment, it’s clear that respondents reporting better-than-expected pickups in business activity aren’t immediately responding with similar strength when it comes to rehiring. Millions of workers are likely to remain unemployed for a prolonged stretch, and investors should continue to focus on the employment components of surveys such as the ISM’s for clues about the broader economic recovery.
Write to Lisa Beilfuss at lisa.beilfuss@barrons.com
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Activity Surges in Services Sector. Employment, However, Continues to Contract. - Barron's
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