Services Sector Weakens

For the most part, investors this week were simply passing time ahead of key inflation data and a Fed meeting next week. Although the few economic reports released this week were generally a little weaker than expected, mortgage rates ended slightly higher.?

The most significant report this week, from the Institute of Supply Management, revealed a little more weakness than expected in the services sector. The ISM national services sector index fell to 50.3, below the consensus forecast of 52.0, and the lowest level since December 2022. Readings above 50 indicate an expansion in the sector, so there is still slight growth.?

Consumers have shown a preference for services over goods since the reopening of the economy following the pandemic. While services may be growing less quickly in recent months, the last two ISM manufacturing sector readings have been solidly in contraction territory around 47. Since the services sector represents over 75% of U.S. economic activity, while manufacturing accounts for roughly 12%, investors place more weight on the performance of the services industries. As long as consumers keep spending steadily on activities such as trips and entertainment, investors believe that the economy will hold up pretty well despite massive monetary tightening by the Fed.??

The Department of Labor releases the total number of new claims for unemployment insurance each week. The latest reading was 261,000, above the consensus forecast of 235,000 and the highest level since October 2021. While these figures were significantly inflated during the early months of the pandemic, current levels are now in line with the readings around 250,000 which were typical during 2019.?

What this week lacked in major economic events, next week will more than make up for. The highly anticipated Consumer Price Index (CPI) inflation report will be released on Tuesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. The next Fed meeting will take place on Wednesday, and investor expectations on what officials will say and do span an unusually wide range. Retail Sales will come out on Thursday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.