Service sector remains healthy

The May ISM Service Sector report beat expectations (56.3 vs. 55.5), but its apparent strength is probably due in part to a bounce back from the weather-related slump of prior months. Nevertheless, it is one more indicator that the economy is almost certainly continuing to grow, albeit at a modest rate.

Like the Service Sector Composite, the Business Activity report was also strong, right up there near the top of the current recovery's range.

The Employment report, however, was lackluster. This suggests that the strength reflected in the overall index was only temporary, a bounce back from earlier weakness. Without more aggressive hiring intentions on the part of business, economic growth is unlikely to ramp up to a higher level.

It's encouraging, nonetheless, to see that the Eurozone service sector continues to improve after emerging from a recession last summer. Taken together, the U.S. and Eurozone service sectors haven't been this healthy for several years. Synchronized global recoveries are almost always better than the alternative.

Jon Hilsenrath reports in today's WSJ that the Fed is concerned about the low level of equity market volatility ("Fed Officials Growing Wary of Market Complacency"). I made a similar observation last week, but I suggested that rather than implying that the market is complacent or vulnerable to bad news, it might be a sign that the market is vulnerable to good news. It's not hard to see why volatility is low, considering that almost all the economic indicators point to continued, modest growth. There is no sign of any disturbing increase in inflation, no sign of overheating, no sign of excessive optimism, and almost no chance that monetary policy is going to upset the apple cart any time soon. Low volatility means the market is confident that we're going to continue to experience a disappointingly slow recovery, and that's not unreasonable at all given the evidence.