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What is hidden behind this strong rebound in corporate confidence ?

The ISM Services index reached an astonishing level in June in the USA, but this number hides less rosy information.

In its latest release, the ISM Services index posted its largest single-month percentage point increase since its inception in 1997, only two months after recording its biggest fall ever. At 57.1, the reading would normally be a welcome sign that managers are comfortably optimistic about the expansion.  One detail, however, drew our attention: Employment (one of the four, equal-weighted components in the index, together with Business Activity, New Orders and Supplier Deliveries) did not improve from its March level.

We previously discussed our relative confidence in the strength of employment, as US companies had mostly furloughed their employees rather than terminated them. As a matter of fact, the US jobless rate reached 14.7% in April, and fell in the following two months. In June, though, it was still 11.1%, and its improvement pace was slowing. A growing number of companies recently announced job cuts. Hilton, Textron, AT&T, Bed Bath & Beyond, Macy’s, Deere, Sonos, Levi’s… the list keeps getting longer.

Moreover, some relief measures will end soon and weigh on consumer confidence: unless new measures are adopted, the federal program which currently distributes $600/week to 32mln people, of which 14mln not eligible for regular unemployment benefits, will end on July 31. Fortunately, the Paycheck Protection Program granted to small businesses to maintain payrolls was extended from June 30 to August 8, and will thus have effects until the end of the year.

Given the US dependence on domestic demand, a return to full employment is key for the economy, but it will almost certainly take longer than expected and more fiscal support may be needed.

Anne-Laure Fantuzzi – July 17, 2020

 

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