Service Sector Gains Momentum at Mid-Year, June Employment Indicators Positive
- The ISM Non-Manufacturing Index for June increased to 56.5 percent.
- The U.S. International Trade Gap widened in May to -$41.1 billion.
- U.S. Auto Sales for June dipped to a 16.7 million unit rate.
As we head into the second half of the year, the service sector of the U.S. economy is gaining momentum. The ISM Non-Manufacturing Index for May increased more than expected, to a solid 56.5 percent, indicating improving conditions. This is consistent with our expectation of stronger GDP growth for the just completed second quarter. Nine out of ten sub-components of the headline index were positive and eight out of nine of those were positive and improving. The only component below the break-even 50 mark was backlog of orders, which dipped to 47.5 percent. Overall business activity was strong at 59.5. New orders were also strong at 59.9. The employment sub-index flipped from a contracting 49.7 in May to an expanding 52.7 in June. That is supportive of a better payroll jobs number for June. Fifteen out of eighteen industries reported growth. Anecdotal comments were generally positive. The ISM Manufacturing Index for June, reported last Friday, also increased, climbing to a moderately expansive 53.2. The employment sub-index of the ISM MF increased to a barely positive 50.4 in June. The U.S. payroll data for June will be released this Friday morning. We expect to see a bounce back from the dismal 38,000 net new jobs added in May, to about 175,000 for June.
The U.S. international trade gap widened in May to -$41.1 billion as imports increased by $3.4 billion, while exports eased slightly, down $0.3 billion. For the year ending in May, nominal imports are down by 3.1 percent, largely reflecting the drop in oil prices from a year ago. Nominal exports are down 4.2 percent. After adjusting for price changes, the real balance of trade in goods went more negative in May. To date, trade looks to be a fairly neutral for GDP growth in the second quarter, but that could change with the June data and any revisions to May and April.
As reported last Friday afternoon, U.S. auto sales for June dipped to 16.7 million unit annual rate. This is not a bad number, but it is a clear step down from the robust 18 million unit rate from late last year. It adds weight to our characterization of peaking auto sales in the fourth quarter of last year. Also, the softer auto sales for June suggest that expectations for very strong consumer spending in the second quarter should be tempered. We expect real GDP growth in the neighborhood of 2.5 percent for Q2.
Market Reaction: U.S. equity markets opened with losses but have since recovered. The 10-year Treasury bond yield is down to 1.38 percent. NYMEX crude oil is down to $46.49/barrel. Natural gas futures are down to $2.77/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Int Trade 07-06-16.