No Worries as Service Sector Stays Healthy Despite ISM Index Decline in April

I think it is safe to conclude that the service sector remains healthy. The Institute of Supply Management (ISM) announced on Tuesday that its non-manufacturing, service index declined to 53.6 in April, down from 54 in March. I would not worry about this decline, since any reading above 50 signals an expansion, and the ISM service index has been above 50 for 22 consecutive months.

The primary reason for the deceleration was that the new orders component slowed to 53.5 in April, down sharply from 60.6 in March. Many other ISM service components improved in April, such as business activity (up 2 points), employment (up 2.8 points) and supplier deliveries (up 0.6 points). Fully, 14 of the 17 service industries that ISM surveyed improved in April, up from 13 industries in March.

The Commerce Department announced that the U.S. trade deficit rose 4.3% in March to $60.3 billion, which may cause some economists to trim their first-quarter GDP calculations. Specifically, imports rose 2.3% in March to $381.2 billion, while exports rose 2% to $320.9 billion. Due to surging energy prices, the April trade deficit should be lower. In March, passenger car imports rose $2.8 billion, so this may come under more pressure if President Trump increases automotive tariffs on the EU to 25%, up from 15% as he has been threatening.

Overall, I expect the U.S. trade deficit to shrink in April due to booming energy exports. I should add that Canada reported its first trade surplus in six months in March of $1.3 billion due to booming gold/mineral (up 24%) and energy (up 15.6%) exports.

The Middle East supplies about 20% of the aluminum consumed in the U.S., so the blockage of the Strait of Hormuz is now hindering the auto industry and other aluminum-intensive industries. Prices for aluminum from U.S. smelters have risen nearly 90% in the past year. Canada remains a major supplier of aluminum due to its cheap hydroelectric plants, which give it a competitive advantage, despite tariffs. In the meantime, the inventory of Ford’s F-150 trucks is now only 42 days, down from a normal supply of 60 days.