ISM Services Weaker Than Expected

Includes: DIA, QQQ, SPY
by: Bespoke Investment Group

Investors have hoped that the slow end to winter will have a positive impact on economic activity, but the boost that we have seen so far has not been quite as large expected. A case in point is today's ISM Services report. While the headline reading improved from 51.6 up to 53.1, the increase was not as much as economists were expecting (53.5). On a combined basis, which weights the ISM Manufacturing and ISM Services based on their overall share in the economy, the combined ISM increased from 51.8 to 53.2. Two potential reasons for today's weaker than expected report are weather and Obamacare. In each month's reports, ISM asks respondents for commentary on the business climate. In this month's report two comments that stood out. In the retail sector, one respondent noted that, "Business was a little slower than expected due to harsh weather conditions across much of the country, but we expect a rebound as spring approaches." In the Healthcare Sector a respondent highlighted the fact that, "Healthcare reform continues to adversely impact hospital projected/actual revenue."

Looking at the internals of today's report showed a mixed picture. Relative to last month, five components showed improvement while five deteriorated. Employment showed the biggest increase in March rising from 47.5 up to 53.6. While that may seem like a good preliminary indicator for Friday's employment report, keep in mind that last month the employment component saw its largest one month decline since November 2008, yet the non-farm payrolls report still showed a month-over-month increase. Given that, we wouldn't place too much weight on this month's increase in that component.