Global Service Sector

Global Service Sector Slows, Contracts in the U.S

Market and its partners released February service-sector purchasing manager indices (PMIs) for 12 countries and the global economy Thursday, which show that service sector growth in five countries as well as worldwide has slowed since January, while in three countries services have dipped into contraction (a reading below 50). In one country, Brazil, the rate of contraction has accelerated.



United States:

The U.S. service sector dipped into contraction of 49.7 in February from growth of 53.2 in January, in its weakest performance in nearly two and a half years. Markit chief economist Chris Williamson commented: “Business activity stagnated in February as malaise spread from the manufacturing sector to services.” He added, “worse may be to come.” A stubborn divergence in data from the relatively prosperous services sector, which makes up about 80% of the U.S. economy, and the struggling manufacturing sector have persisted for months. A common assumption has been that services’ greater clout would win out until manufacturing recovered, but Markit’s survey suggests that view may be too optimistic.


China’s service sector is still growing, at 51.2, though it fell slightly from its six-month high of 52.4 in January. While that may be encouraging, China’s manufacturing sector poses the greater threat to global investors for now. China grew at unprecedented rates for the past decade, driven by its manufacturing sector, but has not yet completed the transition to a consumption-based – as opposed to an export-based – economic model. Caixin’s Composite China PMI, which includes manufacturing as well as services, fell from into contraction in February, from 50.1 to 49.4. Chinese chief economist He Fan commented: “Overall, the services sector has outperformed manufacturing industries, reflecting continued improvement in the economic structure. While implementing measures to stabilize economic growth, the government needs to push forward reform on the supply side in the services sector to release its potential.


Russia saw largest increase in the index, going from contraction at 47.1 to slight expansion at 50.9. The declining price of oil and Western sanctions over Russia’s actions in Ukraine have battered the Russian economy, which shrunk by 3.1% in 2015, according to the Economist. Markit economist Samuel Agass notes that new business levels in the country rose for the first time in four months, due in part to the depreciation of the rouble. He cautioned, though, that headwinds remain: “Workforce numbers are sliding and companies continue to report a deterioration of outstanding business levels. At the same time, the weaker exchange rate continues to drive up costs and paces pressure on firms’ operating margins.


Brazil saw the steepest fall in the index, from a contraction of 44.4 to a deeper contraction of 36.9. The country’s economy shrank 3.8% in 2015, its worst recession since the 1980s, due to falling commodity prices and the fallout from a corruption scandal implicating the state oil company Petróleo Brasileiro S.A. – Petrobras (PBR) and the ruling Workers’ Party. Markit senior economist Rob Dobson’s outlook for the country is grim: “With the global economy also showing signs of slowing, which will impact on external demand, it looks as if the downturn is set to continue to run its course in the coming months.”

The Bottom Line:

Globally, the service sector is still expanding, but at a slower rate than it was in January. The U.S. economy may be seeing its manufacturing woes creep into services, which bodes ill for the economy as a whole. China, which many consider a threat to the U.S. economy, is still seeing service-sector growth, but the more important manufacturing sector has dragged the economy as a whole into contraction, going by Markit and Caixin’s PMI.
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