Service sector mixed

The February ISM service sector report brought no relief from the harsh winter weather, and most likely was downbeat precisely because of the weather. Still, the news is mixed and there is no reason to think that the outlook for economic growth—which probably remains a sluggish 2-3%—has deteriorated. 

The Business Activity portion of the ISM report fell slightly in February, and is probably the most representative of what is going on: conditions haven't deteriorated, but they are hovering around the lower end of their four-year range.  

The overall measure of service sector conditions is shown in the chart above, and it fell significantly, to its lowest level since early 2010. This was offset to a degree by an improvement in the same index for the Eurozone service sector. Both the manufacturing and service sector reports for February showed a bit more strength in the Eurozone relative to the U.S., and weather is the likely culprit.

The employment index fell dramatically, and stands out as clearly weak. Does it portend a recession? It would if there were other indicators suggesting the same thing, but I don't see any; this therefore looks like an outlier. It's not hard to imagine that bad weather has disrupted hiring plans.

Meanwhile, I note that industrial commodity prices (see chart above) have been rising for the past four months, which suggests that global economic activity has firmed somewhat despite the apparent weather-related slowdown in the U.S.. We know that Eurozone activity has firmed up, and it's likely that activity in the Pacific rim has firmed as well. With this as a backdrop, and knowing that swap spreads in the U.S. remain at very low (i.e., very healthy) levels, it's unlikely that the U.S. economy is on the verge of another recession.

Early last week I noted the recent impressive acceleration in bank lending, and it continues, as the chart above shows. Commercial & Industrial Loans outstanding at U.S. banks are now up at a 20% annualized pace over the past three months—the fastest pace yet during the current recovery. Recall that thanks to the Fed's aggressive addition of bank reserves since 2008, banks have a virtually unlimited capacity to generate new loans. The only thing holding them back has been a lack of confidence and its companion, a strong demand for money. (Borrowing money is akin to a negative demand for money—until recently, banks and businesses in aggregate preferred to hold on to money and to pay down debt.) That is now changing, and that's very good news.