This pandemic recession is unlike all others, and Thursday’s release of the Institute for Supply Management’s survey of sentiment among firms in the service sector adds to the evidence.
The November ISM Non-Manufacturing Index eased to 55.9, which is below the six-month average of 57.1, indicating solid growth in the service sector even as the pandemic rages across the economy. A reading above 50 suggests expansion.
The forward-looking subindex for new orders eased to 57.2, signaling continued growth in the service sector, while the employment subindex firmed.
One needs to be careful with extrapolating the relative health of the economy from surveys of sentiment in the service sector, given the significant damage to small businesses with revenues up to $10 million.
It will be some time before the American small business sector is reconstituted anywhere near January 2020 levels.
There is likely somewhat of a survivor’s bias within responses to the ISM service sector survey, and while we think the economy next year will boom following the delivery of a vaccine to the public, it will be some time before the American small business sector is reconstituted anywhere near January 2020 levels.
In normal downturns, sentiment in the manufacturing sector (shown as the green line in the figure below) tends to lead the service sector (the black line) into downturns. This was the case before the 2001 dot-com bust, the 2008-09 Great Recession, and, more starkly, in the runup to the unofficial 2015-16 mini-recession and the 2018-19 global manufacturing recession.
The economic and financial shock that pushed the economy into the current recession changed that pattern, with sentiment in both the manufacturing and service sectors dropping precipitously.
The shutdown and subsequent reopening of the economy have resulted in 860,000 fewer employees in the manufacturing sector and 9.2 million fewer service sector employees as of October. (November employment data will be available on Friday.)
While we expect that manufacturing will get back on track, the drastic and perhaps permanent changes in where we work, how we work and in the way we shop and entertain ourselves seem likely to require fewer service sector employees, coronavirus or not.
While we do anticipate the economy to move back toward full use of its production capacity by late 2021 or early 2022, it will be some time before it reaches full employment.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
