Service Sector Expands For 14th Consecutive Month, Contrasts With Largest Factory Order Reduction Since April 2020: Tuesday's Economic Digest

Economic data unveiled Tuesday revealed a complex picture of the U.S. economy, highlighting an ongoing expansion in the services sector but a sharper-than-expected decline in factory orders for January.

Tuesday’s Economic Bullets: Key Highlights

• The ISM Services PMI reported a slight decrease to 52.6% in February, down from January’s 53.4% and falling below the anticipated 54%. This marks the 14th consecutive month of expansion in the sector, albeit at a slower pace.
• The prices paid subindex saw a notable reduction to 58.6% in February, down by 5.4 percentage points from January’s 64%, signaling a decrease in inflationary pressures within the service sector.
• Conversely, S&P Global revised its Services PMI to 52.3 in February from an initial estimate of 51.3, showcasing a better-than-expected expansion in service sector activity, marking the second-fastest growth rate since last July and extending the growth sequence to over a year.
• Meanwhile, factory orders experienced a significant drop of 3.6% month-over-month in January 2024, marking the largest decrease since April 2020. This decline followed a revised 0.3% decrease in December and surpassed market expectations of a 2.9% fall.

Economist Reactions

According to Anthony Nieves, chair of the ISM Services Business Survey Committee, “the slight decrease in the rate of growth in February is a result of faster supplier deliveries and the contraction in the Employment Index”. Most respondents generally hold a positive view on business conditions, yet they continue to express concerns over inflation, employment, and persistent geopolitical tensions.

Chris Williamson, chief business economist at S&P Global Market Intelligence, highlighted the service sector’s substantial expansion along with accelerating manufacturing output as indicators of sustained GDP growth. “The acceleration occurred despite a cooling of growth in financial services, linked to the recent pull-back in rate cut expectations,” Williamson said.

The expert noted that consumer demand for goods and services has seen an increase in February, buoyed by the alleviation of the cost of living crisis and robust labor market conditions. “Consumers are once
again at the forefront of the economic expansion,” Williamson stated.

However he cautioned that despite average prices increasing at one of the slowest paces in the past four years, the rate of inflation for both goods and services accelerated in February.

Market Reactions

The latest data prompted a decrease in U.S. Treasury yields, with the 10-year benchmark yield dropping to its lowest point in nearly a month at 4.12%, driven by increasing anticipation of future Federal Reserve interest rate reductions.

Expectations for a rate cut by June jumped to 72%, a significant rise from the previous day’s 65%, with traders factoring in over a full percentage point of reductions by December 2024.

Bonds and gold outperformed stocks on Tuesday. The iShares 20+ Year Treasury Bond ETF TLT rallied 1.4%, while the SPDR S&P 500 ETF Trust SPY and the Invesco QQQ Trust QQQ fell 0.9% and 1.9% respectively.

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