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MARK-TO-MARKET: The US service sector’s road to recovery

MARK-TO-MARKET: The US service sector’s road to recovery

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Released each month by The Institute for Supply Management, the ISM Services Index is a measure of the economic condition of the American service sector. The service sector is one of three tiers that formulate the structure of the U.S. economy. The other two are raw materials production (which includes agriculture) and manufacturing production. The U.S. has the world’s largest service economy, which includes the retail, transportation, utilities, leisure & hospitality, information, real estate and financial services industries, among others.

The ISM Services Index has a benchmark of 50. Any index level above 50 indicates the service sector is growing and expanding. Below 50, the sector is contracting.

On Monday, the ISM released its March report, which showed the services index had jumped from 55.3 in February to 63.7 — the highest index level in recorded history. This surpassed the previous record of 60.9 set in October 2018. All 18 service industries reported growth in March. The record low for the ISM Services Index is 37.3, set in December 2008 during the sub-prime mortgage crisis.

America’s service industries felt the brunt of the impact from government-mandated business closures and capacity restrictions. At the height of the COVID-19 pandemic in April and May, the services index plummeted to 41.6 and 45.4, respectively. This marked the first time since 2010 the index fell below its benchmark level of 50.

Driven by the strong economic recovery in the second half of 2020, the service sector has been in a steady, though gradual, recovery. In fact, March was the 10th consecutive month of growth. Over the past six months, the continuing rollout of vaccines has helped to accelerate the reopening of the U.S. economy.

The Department of Commerce’s March Employment Report further quantifies the progress being made within the service sector. Two of the service industries hardest hit by the pandemic were Retail Trade and Leisure & Hospitality.

In February 2020, the Retail Trade industry employed more than 15.6 million Americans. Two months later, in April, that number fell to 13.2 million. However, as of March 2021, the Retail Industry now has 15.2 million workers, down just 400,000 jobs from its pre-pandemic level.

But nothing can compare to the struggles of the Leisure & Hospitality industry, which includes bars, restaurants, hotels, theaters, casinos and sporting venues. In February 2020, the Leisure & Hospitality industry employed more than 16.9 million Americans — a record high at the time. By April, the Leisure & Hospitality industry had lost 8.2 million jobs — almost half its total workforce. Fortunately, the Leisure & Hospitality industry has since recaptured 5.1 million jobs. However, its current labor force of 13.8 million is still 3.1 million jobs shy of a full recovery.

Of all the varied facets within our economy, by far the greatest impact from the pandemic was to the American service sector. Even with the current pace of vaccine distribution, it will still take time before all service businesses are free from restrictions and public mind-set returns to pre-pandemic normalcy. But the vaccines will continue to play a critical role in America’s economic recovery. And the U.S. service sector will be one of the biggest benefactors.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.


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