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U.S. Service Industries Cooled in April as Hiring Gauge Fell

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Growth in U.S. service industries cooled in April to a four-month low and hiring eased, adding to signs the economy is off to a softer start this quarter, an Institute for Supply Management survey showed Thursday.

Highlights of ISM Non-Manufacturing (April)

  • Non-manufacturing index fell to 56.8 (est. 58), third consecutive drop, from 58.8; readings above 50 indicate expansion
  • Measure of business activity declined to 59.1, also a four- month low, from 60.6
  • Gauge of new orders little changed at 60 after 59.5
  • Employment index declined to 53.6, lowest in a year, from 56.6

Key Takeaways

Even with the drop in the main index, orders and growth remain solid for service industries, which account for about 90 percent of the economy, and a tax-driven boost to consumers’ and companies’ coffers is expected to underpin demand. Meanwhile, businesses may be having difficulty finding qualified workers, and tariffs on imported metals are hitting a variety of firms.

While respondents remain positive about business conditions and the economy, they expressed concern about tariffs and their effect on the cost of goods, according to Anthony Nieves, chairman of the ISM non-manufacturing survey committee. The trade levies will cause “unintended consequences” across industries and commodities, according to one company cited by ISM in the sector of professional, scientific and technical services.

All 18 non-manufacturing industry groups reported growth for April, up from 15 in March. The latest reading for services is in line with the average for all of last year and above its average for the economic expansion that began in 2009. The Tempe, Arizona-based ISM’s non-manufacturing survey spans industries such as retail, utilities, health care and construction.

At the same time, the gauge of employment weakened and followed the group’s factory figures that showed a manufacturing payrolls index fell for a second month. Economists look to both reports to tweak estimates for the April jobs tally, due Friday from the Labor Department.

Service providers are having relatively less trouble meeting demand than their manufacturing counterparts. Service-industry order backlogs declined to a three-month low and a gauge of delivery times fell to the lowest level since November. Both those measures climbed in the April factory survey.

Services growth will continue to “hum along,” though it will be hard to sustain the recent pace of strong job gains due to a scarcity of skilled labor, Nieves said on a call with reporters.

What Our Economists Say

The first-quarter average of the ISM headline was the strongest quarterly result in the history of the series. It was always going to be a challenge for the diffusion index to sustain such vigorous readings. While the index fell more than expected in April, it would be premature to conclude that this is the start of a significant cooling.

-- Niraj Shah and Carl Riccadonna, Bloomberg Economics

Read more for the full reaction note.

Other Details

  • Index of supplier deliveries fell to 54.5 from 58.5; measure of order backlogs dropped to 52 from 56.5
  • Prices-paid gauge edged up to 61.8 from 61.5
  • Export orders index rose to 61.5, highest in a year, from 58

— With assistance by Kristy Scheuble

(Updates with graphic.)
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