More Growth, At Your Service(s)

Earlier this week, fearful sentiment latched onto slowing-yet-still-growing US and Chinese manufacturing data and claimed this was a sign of a gathering market storm. However, manufacturing is merely one segment of the global economy. Data from many major developed markets released Wednesday showed services output provides a more complete picture—a picture of continued growth. And for those keeping score, services output dominates developed world economic output. This alludes to a reality brighter than recent fears give credit to.

In the US, the Institute for Supply Management’s (ISM) January non-manufacturing index rose to 54 from 53 in December—its 48^th consecutive month of expansion (a reading of 50 or more means expansion). The forward-looking new orders component rose 0.5 percentage point to 50.9. To keep up with those new orders, inventories are rising, too—the inventories sub-index moved into expansionary territory, rising to 50.5 from 48.0 last month. Backlogs rose by 3.0 percentage points, suggesting firms have even more work ahead of them as they try to keep pace with rising demand. This also likely contributed to January employment gains (up to 56.4 from 55.6), as firms increase hiring to keep up with production.

Across the pond, January UK services PMI declined to 58.3 from December’s 58.8—below expectations for 59. But before presuming this incremental cooling (to a still-quick pace of growth) is a harbinger of things to come, take a look at the underlying components. This was quite a bullish slowdown, indeed.

The reason for the cooler growth? Businesses couldn’t staff up sufficiently to keep pace with demand, weighing on output growth. Backlogs increased for a tenth consecutive month—and at the sharpest rate since May 1997. The take away from this is fairly simple—and positive news. Service employment levels seem set to continue a 13-month consecutive trend of rising. As the UK economy continues to grow, that trend likely continues.

Across the English Channel, Markit’s eurozone services gauges showed growth slightly accelerated, to a still tepid 51.6 (from 51.0 in December). And most of the bloc’s members grew at a slower clip in the month. But this is only one of two major sectors, and as we reported Tuesday, eurozone manufacturing PMI hit 54 in January. Taken together, composite PMI (services and manufacturing combined) hit a 32-month high of 52.9. Germany, the eurozone’s largest economy, saw healthy output growth, but also expanded at a slower pace. France and Italy saw further contractions. But perhaps most notable was Spain’s expansion. It posted a faster pace of growth in January and a majority of Spanish services industry firms polled added new workers for the first time in 70 months.

While many clung to the slower growing manufacturing in the US and China early this week, far fewer seem to note the global growth in developed world services output. Which strikes us as odd, considering services dominate developed world output. The eurozone, UK and US economies are 72.8%, 78.5% and 79.7% tilted toward it. To us, that such a significant portion of many economies continues to improve—and at a healthy pace—suggest current sentiment-driven fears are overwrought. Fundamentals (like service sector improvement) underpin long-term market returns, and for investors, positive fundamentals suggest more bull market ahead.