Some Sunshine From Services Surveys

Good news seems to be in short supply these days. If screaming heads prophesizing doom about the global economy have you a bit rattled-especially in the wake of Brexit, you can take solace in the economic news since. This week saw the release of new PMIs from the US and abroad. The latest word: Service sectors in developed economies globally seem to be chugging along just fine.

First, a PMI primer. Purchasing managers' indexes (PMIs) are monthly surveys aiming to capture economic activity in a given sector (usually manufacturing or services). Because of their speediness and easy-to-interpret figures-readings over 50 suggests a majority of businesses surveyed grew-pundits frequently cite PMIs as quick-and-handy evidence of economic growth (or lack thereof). However, by no means are they perfect.^[i] Businesses fill out these questionnaires based on a limited timeframe (usually about two weeks), and they also only show the breadth of growth, not the magnitude. In short, PMIs are a rough snapshot of trends, not a measure of output.

With that in mind, the Institute for Supply Management's (ISM) Non-Manufacturing PMI report is more evidence US growth remains intact, hitting 56.5 in June-the highest reading since November 2015. June's number accelerated from May's 52.9 and was the 77^th straight month of growth. Out of the 18 non-manufacturing industries covered, only three contracted: Educational Services; Professional, Scientific & Technical Services; and the mysteriously named Other Services.^[ii] Moreover, the forward-looking New Orders subindex reached 59.9, up from May's 54.2. Today's orders are tomorrow's production, a promising sign for more growth. Now, even though the ISM's Non-Manufacturing PMI isn't solely services-it also includes mining and construction, for instance-it still provides a wide view of the US' consumption- and services-dominant economy.

June's report isn't an anomaly. The current US expansion is in its seventh year, and the Non-Manufacturing PMI has been in expansionary territory for most of it. (Exhibit 1)

Exhibit 1: ISM Non-Manufacturing PMI Since June 2009

Source: Global Financial Data, as of 7/6/2016.

Now, we aren't arguing US growth has been secretly robust for the past seven years and few have noticed. We also aren't saying the expansion will continue solely because of PMIs. However, for folks who have been-and continue to be-dour about economic growth in general, these data show reality is better than commonly portrayed.

This isn't solely an American phenomenon. Like the US, many developed world economies have robust services sectors. Their services PMIs have similarly been in expansionary territory for a while-an oft-underappreciated nugget of economic data. Starting on the Continent, Markit's June eurozone services PMI hit 52.8 (its composite PMI, which combines both manufacturing and services data, reached 53.1). Across the bloc's four biggest economies, Spain (56.0), Italy (51.9) and Germany (53.7) reported growthy^[iii] services PMIs. Only France missed the party at 49.9. As Brexit speculation reached its crescendo, UK's Markit/CIPS June services PMI registered 52.3 in June, slower than May's 53.5 but still expansionary. Now, these data were collected from June 13-28, so only five days reflect the Leave camp's Brexit victory. It is possible Brexit could impact future data, including PMIs. However, in the here and now, the UK is still part of the EU and will be for the foreseeable future. Regardless of what headlines may suggest and pundits speculate, Brexit shouldn't negate the UK's robust economic strengths.

Taking an even higher-level view, the JPMorgan Global Services PMI hit 51.3, again indicating broad business growth. 15 countries make up this gauge, accounting for nearly 75% of global service sector output. Besides stalwarts like the US and UK, this PMI includes smaller developed economies like Ireland and New Zealand as well as major Emerging Markets like China, India and Brazil. Here too, the story remains the same: Services sectors are growing, the world round.

The media has many eye-popping stories to fill the front page these days, causing less flashy news to fall into the background. However, we caution investors from losing sight of those seemingly boring data tidbits, which show reality isn't nearly as bad as many portray. For all the concerns about the global economy, services sectors keep growing. Forward-looking indicators suggest this should continue, too. These are all important facts to remember, particularly when trouble seems to lurk around every corner.