A weakening service sector suffering from slow growth will be reflected in ISM’s April non-manufacturing report that is scheduled to be released Friday.
Economists expect the survey’s composite index to decline to 54, from 54.4 in March, which will be its lowest reading in eight months. Nevertheless, readings above 50 indicate expansion in the industries comprising more than 85% of the U.S. economy. April is expected to become the 40th consecutive month in which the index expanded.
The fiscal debate in Washington appears to be the single most important reason the service sector looks trapped into mediocre growth, although consumer spending has been strong in recent months.
“The index is going to show some impact from the sequester. Some companies have only now started to feel the pressure,” said Nathaniel Karp, executive vice president and chief U.S. economist of BBVA Compass. “When something happens, you don’t start firing people overnight. You have to wait until you start feeling the pain in the sales’ side.”
Other factors, like the recent tax hikes, are also likely to have taken a toll.
“It’s not as if companies can’t find people to hire. But with all this policy uncertainty, they prefer to wait,” Karp said.
Estimates about the performance of the service sector and the report on the employment -which will be coming out Friday as well- were more optimistic earlier this week. However, a weak ADP private payrolls report and an equally disappointing reading in ISM’s manufacturing survey have reversed the consensus.
“If we look at a variety of reports that have been out, it’s easy to say that the overall economy has lost its momentum,” said Thomas Simons, an economist at Jefferies and Co.
Some sectors, though, seem to have survived the recent turmoil unscratched, keeping up their pace to full recovery.
For the service industries, construction has been the most promising one as low interest rates and high rents have made consumers grow more positive about home-ownership.
“Housing has been totally immune to the slowdown. The (Standard and Poor’s) Case-Shiller index once again rose and growth in construction is solid,” Simons said.
Despite all the uncertainty, however, it is likely that the spring slowdown will soon give its place to steady growth as the effects of the sequester will begin to fade.
“At corporate level, businesses are doing well, but refrain from investing,” Karp said. “The impact of the sequester, though, spreads out. Whatever happens now, it will give us a clue for what we should expect at the second half of the year.”