Dec ’19 Non-manufacturing PMI to rise

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The Institute for Supply Management will release the results of its non-manufacturing PMI survey. This will be one of the two main reports that will influence the markets this week.

Economists are hoping that activity in the non-manufacturing, or services sector, will rise from 53.9 in November to 54.5 in December.

Non-manufacturing activity in November fell to 53.9 declining from the previous month’s print. The data, which was released in early December signaled that the decline in the non-manufacturing sector was consistent with a 1.9% GDP growth for the fourth quarter of 2019.

Today’s report will be important as it will help investors further ascertain how the US economy grew in the final three months of 2019. There is increasing concern that growth is starting to slow.

Despite the Federal Reserve lowering interest rates three times in the course of 2019, and simultaneously injecting liquidity through the repo markets, activity in business is yet to pick up.

There was somewhat of a closure to the US and China trade saga only into the mid-month period. Still, it is unlikely to expect business activity to pick up strongly after the United States announced a Phase one deal was complete with China.

As a result, there is a chance that non-manufacturing activity could slip in December. This was evident from the recently released manufacturing PMI report.

ISM manufacturing activity contracted in December, marking a fifth consecutive decline in the manufacturing sector. Coming in at 47.2, this was the lowest level registered since December 2008.

What will be the impact of a weaker NMI PMI in December?

Given that the services sector contributes to nearly 80% of the overall US GDP, a weaker reading could potentially seal the deal. Despite weakness in the manufacturing sector, the non-manufacturing or services activity remains buoyant.

But this could change if we see some sort of deterioration in the index for December. The impact could be felt even more on the forward-looking GDP trackers. After last Friday, forecasts indicate that the US economy will rise by 1.9% in the fourth quarter of 2019.

But a weaker ISM non-manufacturing PMI could further shave off a few points, putting growth in the vicinity of 1.5%.

On the flip side, given the fact that December usually sees higher spending from the consumer side, there is scope that the services sector will get a boost. In such an event there is an upside possibility.

Going by the forward estimates on the reading for December, we see that investors are pricing this in already. Thus, in the best-case scenario, the US GDP will remain close to the 2.0% average GDP growth region.

It is easy to see that the downside risks are much higher and the GDP estimates will hinge on the outcome of the ISM non-manufacturing PMI activity for December 2019. The impact of this will trickle across all asset classes, including equities and currencies.

How will the Fed Respond to the ISM NMI?

The non-manufacturing PMI will also start to put pressure on Fed officials. The Federal Reserve is expecting to keep interest rates unchanged this year. But things could change if the ISM activity points to continued declines.

But the Fed will likely buy more time. Any major changes to monetary policy will come in March.

This gives officials enough time to assess economic activity. There is scope for business activity to pick up in the months after December. This comes from the optimism in the US and China trade negotiations. As a result, there is a chance for business activity to pick up pace in the coming months.

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