Service Sector Economy Booming

Financial FAQs

There was a huge jump in the U.S. service sector economy, our largest sector, some 67 percent of all U.S. economic activity. This is why we keep growing while most other developed and emerging economies aren’t.

"The Institute of Supply Management’s non-manufacturing index registered 55.7 percent in April, 1.2 percentage points higher than the March reading of 54.5 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased to 58.8 percent, 1 percentage point lower than the March reading of 59.8 percent, reflecting growth for the 81st consecutive month, at a slower rate in April.”

Even more importantly, the New Orders Index registered 59.9 percent, 3.2 percentage points higher than the reading of 56.7 percent in March, said the ISM press release. The Employment Index increased 2.7 percentage points to 53 percent from the March reading of 50.3 percent and indicates growth for the second consecutive month.

Graph: Calculated Risk

The service sector is booming because it includes most consumer-based services, such as Wholesale Trade; Health Care & Social Assistance; Utilities; Finance & Insurance; Real Estate, Rental & Leasing; Construction; Agriculture, Forestry, Fishing & Hunting; Public Administration; Professional, Scientific & Technical Services; and Retail Trade. The four industries reporting contraction in April are: Other Services; Mining; Transportation & Warehousing; and Educational Services.

So they are all the businesses that cater to consumers. In fact, the index is back to the highs of pre-recession 2005-2006. Much this is due to the rising consumer demand for goods and services as we approach full employment.

Even the Prices Index increased 4.3 percentage points from the March reading of 49.1 percent to 53.4 percent, indicating prices increased in April for the first time in three months and counteracting the recent deflationary trend that comes mostly from falling commodity and energy prices. According to the NMI®, 13 non-manufacturing industries reported growth in April. The majority of the respondents’ comments reflect optimism about the business climate and the direction of the economy.

What other factors favor higher growth this year, in spite of the initial estimate of 0.5 percent GDP growth in Q1? Even the manufacturing sector is showing better growth this spring. April's 50.8 (i.e., more than 50 percent of manufacturing supply managers surveyed means growth) for the ISM manufacturing index may be moderately below expectations for 51.5 but details in the report are positive,” says Econoday. “New orders did slow by 2.5 points but the level at 55.8 still points to a very solid rate of growth.

New export orders, offering positive evidence on the effects of the lower dollar, are also positive, unchanged at 52.5 which isn't dramatically above breakeven 50 but is still very solid for this reading and the best since December 2014. Backlog orders are still rising, though just barely at 50.5, but this along with March's 51.0 are the best two months for this reading also since December 2014.

So, continued growth in both sectors of the economy—with the service sector particularly strong—is reason for optimism that we can yet achieve 3 percent GDP growth this year.

Harlan Green © 2016

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