The Institute for Supply Management released a report this morning showing that the U.S. services industry contracted at a slower pace in May.
That could signal the end of the economic slump.
“The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 44, the highest level in seven months yet lower than forecast, from 43.7 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction,” reports Bloomberg’s Shobhana Chandra.
Even though this level is the highest the nonmanufacturing index has been in seven months, it’s the eighth consecutive month that the index has been below 50.
This news is in line with other economic news that shows continuing weakness in the face of some improvement.
CNNMoney notes, “A gauge of employment in the sector also improved to its highest in seven months but new orders, a measure of future activity, weakened.”
And in an interview with Reuters, Jonathan Basile, an economist at Credit Suisse said, “It's encouraging to see this stabilization process start to take hold, but at the same time the weakness does persist. These are still indications that we're not totally out of the woods yet.”
In essence, the small increase in the index means that fewer firms reported worsening conditions in May than in April, says MarketWatch’s Rex Nutting.
“Six of 18 industries were growing in May: real estate, arts, utilities, retail, construction and accommodations,” he reported.
But how much can these industries grow when the U.S. consumer has been snapping the wallet shut?
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Commerce Department data shows that the U.S. saving rate hit a 14-year high of 5.7% in April.
A Harvard Business Review article reports that the consumer de-leveraging is likely to be a slow and painful process, according to The Wall Street Journal.
The article’s authors, William Jarvis and Ian C. MacMillan, write, “It would take consumers 1.3 years to pay down existing debt with their current after-tax income, provided they spent that income on absolutely nothing else. That means no purchases of clothes, food, coffee at Starbucks, or anything else for 16 months.”
That’s not news to Zachary Scheidt. He’s the editor of Death Cross Trader.
Zach says, “Consumer retail is one of the most dangerous areas to invest in right now as spending levels continue to be just plain horrible. Last week investors were cheering an economic release that showed incomes ticking higher, but they totally missed the point that despite more money in their pockets, spending actually declined.”
“In the U.S.,” he adds, “we are in the very early stages of a macro shift from being a nation of spenders to becoming a nation of savers. This kind of a move takes years, if not decades, to complete and during that time it will be very difficult for luxury retailers to find buyers.”
That means that even as the population begins to see recovery in their earnings, people will more likely pay off debt, and start saving, rather than spend, Zach says.
So what does this mean for investors? Is retail a great sector to short? Not yet, warns Zach.
“At this point we haven’t added any short positions in retail because the tide hasn’t quite turned yet. There are times when you know the market is acting stupid, but all you can do is sit back and wait while the house of cards is built. But don’t worry, once the last card is placed on top and the winds of change start to blow, we’ll be all over this trend, profiting from the coming drop.”
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