The numbers: The service side of the U.S. economy that employs the vast majority of Americans posted somewhat faster growth in May and executives were “mostly optimistic” despite worries about trade tariffs and a shortage of skilled workers
An index of service-oriented companies such as banks, restaurants and computer developers rose to 56.9% last month from a two-and-a-half-year low of 55.5% in April, the Institute for Supply Management said Wednesday.
Numbers over 50% are viewed as positive for the economy, and numbers over 55% are considered exceptional.
The increase in ISM’s services index countered a small decline in the firm’s survey of manufacturing executives, reflecting a widening split in the economy. Service companies are still growing at a steady pace while manufacturers have dropped off.
What happened: An index for business production climbed 1.7 points to 61.2% and the index for new orders edged up to 58.6%.
The index for employment, what’s more, rose 4.4 points to 58.1%, not far from its all-time high.
Altogether, 16 of the 17 industries tracked by ISM said their businesses were expanding.
“The non-manufacturing sector continues to experience a slight uptick in business activity, but it is still leveling off overall,” said the ISM’s Anthony Nieves, who manages the survey. “Respondents are mostly optimistic about overall business conditions, but concerns remain about tariffs and employment resources.”
The closely followed ISM services index showed more strength than a similar survey by IHS Markit that fell in May to a three-year low.
Big picture: The economy is still growing, but it’s more fragile now than it was one year earlier.
The latest trade fights with China and Mexico haven’t helped, but growth began to slow toward the end of last year. A weaker global economy, softer exports, an up-and-down stock market and the fading effects of the Trump tax cuts have all contributed.
Even a surprisingly strong 3.1% increase in first quarter gross domestic product appears to have been misleading. The gains came largely from temporary improvements in the trade deficit and an increase in business inventories. Consumer spending, the engine of the economy, was the weakest in a year.
Still, the U.S. is likely to continue growing as long as the service side of the economy acts as the locomotive.
What they are saying?: “General conditions are steady, not increasing or going down,” said an executive at a media and entertainment company.
The ability to find “and retain employees continues to strain the business,” said a construction-industry executive.
Market reaction: The Dow Jones Industrial Average
and S&P 500
rose in Wednesday trades, setting up a second straight gain after Federal Reserve Chairman Jerome Powell indicated an openness to a cut in U.S. interest rates.
The mini-rally follows heavy losses in the past two weeks. The stock market has been battered by a flareup in trade tensions with China and now Mexico.
The 10-year Treasury yield
slipped to 2.09%. Just last fall, yields had hit a seven-year high of 3.23%.
The sharp decline since then reflects growing worries about the economy as well as expectations that the Fed would cut interest rates this year.