Service Sector Slumps

Over the past week, disappointing economic data in the U.S. and China was good news for mortgage rates. Comments from central bankers acknowledging weaker global growth also were positive for mortgage rates, which ended the week lower.

Since manufacturing accounts for a relatively small percentage of U.S. economic activity, the reaction to the decline in the sector has been contained. The ISM national manufacturing index is at the lowest level since 2009, and recent readings indicate that the sector is contracting. The stronger dollar and weakening demand in other countries have hurt U.S. companies.

The service sector, however, which represents over 80% of the U.S. economy, has been much less affected by slowing global growth or the strong dollar. It held up much better than the manufacturing sector in 2015. Now it appears that the service sector is growing more slowly. The ISM national services index released on Wednesday declined to the lowest level since early 2014.

Slowing growth, in manufacturing or services, reduces inflationary pressure and, therefore, is good for mortgage rates. Low inflation allows for low mortgage rates. A preferred measure of inflation for the Fed is the core PCE price index. Its most recent reading showed that core inflation was just 1.4% higher than a year ago. The Fed’s stated target level for core inflation is 2%. With inflation at its current level and little pressure to force it higher, the Fed should see little need to raise the federal funds rate very quickly.

Source: MBS Quoteline

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