The Institute of Supply Management will be releasing its survey results on non-manufacturing or services activity this week. The data covers the month of February. Investors expect a modest decline in the index.
After rising to 55.5 in January, the non-manufacturing index is forecast to dip slightly to 55.1 in February.
The forecasts remain consistent with the view that global economic activity is indeed taking a hit due to the virus outbreak. However, it is hard to forecast accurately on the actual impact.
Taking cues from the manufacturing and non-manufacturing reports from China over the last weekend, it was a sobering reading. Both counts of the indexes fell to multi-year all-time lows. This was even worse than the time during the financial crisis. Therefore, markets are likely prepared for a disappointing reading.
In February, both manufacturing and non-manufacturing activity showed strong resilience. Both measures came out beating estimates. Over the past month, various regional indicators were also on a firm footing.
But given the current market concerns, a weaker reading on the index will only give more impetus for investors to sell. Even a strong reading will unlikely help to do much. The US economy has been somewhat resilient so far. However, due to the interdependency of trade, there is a strong chance that the momentum in growth will slow.
For the moment, forward tracking GDP measures point to a 2% average growth rate. This is almost the same pace of quarterly GDP growth since Q3 2019.
Fed Getting Ready to Act if Needed
Last week, on Friday, Fed Chair Jerome Powell called for an extraordinary meeting. It was an effort to calm investor’s nerves. However, the statement was cautious, in order not to further churn the markets.
The Fed chair’s speech attempted to soothe the markets. Powell said that the US economy was “fine” for the moment, but also said that the central bank was ready to act if needed. So far, economic data from the US, at least until January has been solid.
But that could change rather quickly. The next Fed meeting is on March 18th. Investors are starting to bet that the Fed will cut rates this year.
This is contrary to the Fed’s dot plot which indicates that there will be no rate cuts during the year.
Amid the prevailing situation, it is likely that the central bank will be closely monitoring the major gauges of the economy. This includes the ISM’s non-manufacturing PMI as well. Therefore, any signs of weakness in these indicators will trigger the Fed to shift from a neutral to a likely dovish forward guidance.
Will the US Services Industry Get Hit by the Coronavirus?
For the moment, investors will have to wait and watch how the data unfolds. According to some reports, the virus is expected to wipe out more than $10 billion from the US travel industry.
Half of these losses are forecast to come just this year. Due to reduced air travel, the tourism and hospitality industry is also likely to suffer. This, in turn, could prove to be a drag on the non-manufacturing PMI survey.
Many major publicly listed companies have already issued warnings of lower earnings in the coming quarters. This was flagged off by Apple Inc. which came out early to warn investors. Many other companies followed suit as well.
For the moment, investors remain in a panic mode. A positive reading on the non-manufacturing PMI will not help investors much. But a negative reading could once again see investors reacting negatively to the report.