Service Sector in U.S. Shows Signs of Recovery

U.S. services industries showed signs of recovery in June as businesses took early steps to reopen following the easing of some of the coronavirus-related lockdowns, according to two surveys of purchasing managers released Monday. But analysts warned those gains could be undone in July as a resurgence of cases in some states leads to another shutdown of businesses.

Businesses in both surveys reported last month that demand had started to stabilize and that exports were starting to pick up. The pace of job cuts slowed with some companies starting to hire again. Prices rose, another sign of renewed demand. Survey respondents also said they were increasingly optimistic about the outlook, even though overall business confidence remains subdued.

An index of service activity compiled by data firm IHS Markit registered 47.9 in June, up from 37.5 in May. The reading suggests that while economic activity in the U.S. services sector continues to contract, it is doing so at a slower pace. Readings of 50 or above are a sign of expansion while readings below 50 signal contractions.

A separate index compiled by the Institute for Supply Management posted 57.1 in June, the first month-over-month expansion following two straight months of contraction.

The service sector, especially the hospitality and accommodation industry, was hard-hit by the shutdowns this spring. Private service employers shed 17.4 million jobs in April before clawing back 2.5 million in May and another 4.3 million June, according to the Labor Department.

Those job cuts have hit Latino workers in particular since they make up roughly half of all maids and housekeepers, construction workers and roofers, according to the Labor Department. In June, the unemployment rate for those of Latino or Hispanic origin was 14.5%, higher than the unemployment rate for whites, at 10.1%.

Services account for roughly two thirds of the U.S. economy, which means that an improvement in the sector could bode well for growth in the third quarter. Economists surveyed by The Wall Street Journal in June said they expected the economy to grow 14.2% in the third quarter of 2020, following an expected 33.5% decline in the second.

But much will depend on the path of the virus in the weeks ahead. Authorities in Texas and Florida, which had been among the earliest states to reopen, announced new closures and restrictions on restaurants and bars at the end of June, as cases rose. New York, Michigan and California have also ordered businesses to close again as case counts rise.

"There remains a strong possibility that growth could tail off after the initial rebound," said Chris Williamson, chief business economist at IHS Markit. "The need to reintroduce lockdowns to fight off second waves of coronavirus infections will pose a particular threat to recovery momentum and could drive a return of the recession."

Anthony Nieves, who heads ISM's services surveys, noted that despite the return to growth in June, activity remains well below pre-pandemic levels.

"It's all going to be about businesses staying open," he said. "It sounds simple and common sense but I don't think the economy can withstand a prolonged closure again."

Real-time indicators tracking restaurant reservations or visits to retailers show that national activity is leveling off as a new wave of cases prompts people to stay home, said Michael Pearce, senior U.S. economist for Capital Economics.

Mr. Pearce said he expects growth in consumption to be flat in July, which could stall the nascent recovery.

"We're only six days into July but so far it's not very encouraging," he said.

Write to David Harrison at david.harrison@wsj.com


  (END) Dow Jones Newswires
  07-06-20 1245ET
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