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June 3, 2020, 11:38 a.m. EDT

Service side of U.S. economy breaths signs of life in May as states reopen, ISM finds

ISM nonmanufacturing index climbs to 45.4% in May from 41.8%

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By Jeffry Bartash, MarketWatch


Getty Images
A waitress wipes down a table as a restaurant prepared to reopen in Fort Lauderdale, Florida after two months of being closed. The economy is slowly starting to recover, but it has a long way to go.

The numbers: Retailers, restaurants and other service-oriented companies began to recover from the coronavirus pandemic in May, a new survey shows, but business is still extremely slow and points to a U.S. economy still in a deep recession.

The Institute for Supply Management’s survey of nonmanufacturing companies 45.4% in May from 41.8% in April. The April reading would have been the lowest ever if not for a quirk in how supplier deliveries are measured.

Any number below 50% indicates the economy is shrinking and readings below 45% point to recession.

What happened: Production and new orders both rebounded in May and rose above 40%, but they are still near a decade low.

The employment gauge also edged up to 31.8%, suggesting some people are returning to work, but not enough to put a dent in massive service-sector unemployment. Tens of millions of workers have lost their jobs, at least temporarily.

The COVID-19 pandemic has hit the large U.S. service industry harder than manufacturing, a reversal of the usual trend in recessions. Many companies were forced to close or sharply curtail business after states issued stay-at-home orders and customers shied away from hotels, airlines and other businesses at which crowds are typically present.

Not every industry has suffered, however. Financial companies have been busy making loans under a federal government rescue plan while companies that supply farm products, wood, paper and other materials used in consumer staples have also fared well.

“Demand seems to have bottomed out, and we are seeing signs of increasing interest,” said an executive at a forestry company.

Four of the 18 service industries tracked by ISM expanded in May, up from a record-low of just two in April. The other 14 service industries contracted.

Read: Private sector shed 2.76 million jobs in May, ADP says, much less than forecast

Big picture: The huge service side of the economy, which employs more than 80% of all American workers, is starting to rebound. A similar ISM survey earlier this week also showed faint signs of revival in manufacturing.

Read: Manufacturers show faint signs of revival in May as economy slowly reopens

How quickly the economy recovers is an open question, though, especially with protests across the country keeping many stores in big cities closed. The virus is still spreading, if just slowly, and many Americans are unlikely to return to their old ways until they feel safer.

Many service companies, especially in the restaurant business, also face a long struggle just to survive if social distancing remains in effect and firms have to slash customer capacity.

What they are saying ? “Overall, conditions in both nonmanufacturing and manufacturing will likely remain weak over coming months in response to ongoing supply chains disruptions as well as falling demand and a global slowdown,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “An end of shutdowns is a positive, but ongoing virus containment practices are keeping activity subdued for now.”

Market reaction: The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.92% and S&P 500 /zigman2/quotes/210599714/realtime SPX -2.37% rose in Wednesday trades. Many recent indicators including the ISM surveys appear to cement the view that the economy bottomed out in April and began to improve, however slightly, in May.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
26,763.13
-525.05 -1.92%
Volume: 463.20M
Sept. 23, 2020 5:08p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,236.92
-78.65 -2.37%
Volume: 2.46B
Sept. 23, 2020 5:08p
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Jeffry Bartash is a reporter for MarketWatch in Washington.

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