US Service Sector Expands through the End of the Year yet the Dollar Declines

Breaking the indicator down, putting it into historical and broader economic context and measuring it against its international counterparts helps to put the currency’s reaction into perspective. Looking into the components of the composite, we see that there was actually a notable deceleration in key areas of the sector. The key boosters to the headline figure where the Business Activity and Inventory Change figures. However, notable deterioration in New Orders, Export Orders, Backlogs and Employment numbers chips away at the foundation of a steady recovery. Demand is a critical driver for general activity (and overall growth); and these figures suggest the slow economic recovery could in turn stunt the rebound in service sector activity when the temporary influence of restocking inventories passes. Furthermore, for the savvy FX trader, the underperformance of the employment indicator (it rose from 41.6 to 44.0; but a reading under 50.0 represents contraction) is a good signal for this Friday’s NFPs. If the government report follows today’s data, we could see another improvement in the net change figure; but the unemployment rate will maintain its position above 10 percent.

Another reason to doubt this data is its general place in historical terms and guiding the economy towards a recovery. The December headline reading would climb back into growth territory; but it missed the consensus forecast (50.5) and it further supports a moderation in the aggressive recovery from recent record lows set back through the end of 2008. Relating this prominent sector to larger growth trends, this leveling off in sector growth suggest the same will happen for the US economy. To this point, the economy has normalized from a severe period of contraction. However, consumer demand, credit and business activity are still well short of what is needed to support the roaring recovery that financial markets are suggesting is underway. Furthermore, this data tempers the outlook for the US economy relative to some of its major counterparts. Service sector reports in the UK, Euro Zone and elsewhere have shown better results recently than the US data. And while it may not be an overall game change for long-term growth prospects; in the world of speculation, it is enough to adjust the markets bearings modestly.

Written by: John Kicklighter, Currency Strategist
Have questions or comments about this article? Send them to John at jkicklighter@dailyfx.com.