• ISM non-manufacturing index moved back above 50 for the first time in 4 months, while the details of the report were fairly strong
• The three major categories - business activity, new orders, and employment - are all sitting above 50 right now, and 12 of 18 industries reported growth in April
• While the ISM non-manufacturing index adds to the recent string of stronger than expected U.S. data, we think that the tide will turn eventually, and that the weak data releases will resume

The ISM non-manufacturing index rose from 49.6 in March to 52.0 in April, which was quite a bit stronger than what markets were expecting to see. This is the first time this index has come in above the all-important 50 mark since December 2007. Looking at the details of the report, they too were quite strong, and suggest that the service sector managed to hang in there for another month.

Although a few of the sub-sectors softened a bit in April, the important thing is that all three major categories – business activity, new orders, and employment – are all sitting above 50 right now. Business activity (the former headline number) fell a bit from 52.2 to 50.9, while new orders were essentially unchanged at 50.1. Employment, on the other hand, rose from 46.9 to 50.8, which corroborates the payrolls data from Friday, where we saw a 39K increase in employment in professional and business services. Moreover, the breakdown by industry was relatively strong, where we saw 12 industries reporting growth and 6 industries reporting contraction.

Today’s ISM non-manufacturing report adds to the string of surprisingly strong U.S. data that we’ve seen over the last couple of weeks. However, we still don’t believe that the economy is turning around, and in fact question the reliability of some of the stronger data. The April nonfarm payrolls report, for example, is still showing a huge contribution from the birth/death model, which is unlikely at this phase of the business cycle. And in today’s non-manufacturing ISM report, construction was listed as one of the industries reporting growth, which we find dubious. All in all, while we may be in the midst of a lull in the bad economic news, we expect to see things take another turn for the worse going forward. Therefore we think that the Fed will have to cut rates further at some point down the road, and expect to see the fed funds rate hit a floor of 1.25% by year-end.

Jacqui Douglas
Economics Strategist
TD Securities