Zillow Market Pulse: July 6, 2020

July 6, 2020

The service sector grew in June, but the employment picture remains cloudy. Restaurant sales have begun to reverse in states experiencing new surges in COVID cases. And health and economic factors are seemingly altering consumer preferences, which may stunt the economic recovery.

• Strong recovery in the service sector, but there is still a ways to go

  • The ISM Non-Manufacturing Index rose 11.7 points from May to June, to 57.1.
  • Any level above 50 indicates the sector is expanding.

• More details emerging about substance of job increases

  • Hiring activity is still contracting, according to the June ISM, contradicting last week's jobs report.
  • The disconnect suggests that most employment gains are from people returning to their old jobs, rather than new jobs being created.

• Coronavirus may be changing consumer preferences

  • Bloomberg: Half of U.S. adults are not planning to return to bars, even after stay-at-home orders are lifted.
  • Restaurant sales have begun to slide in many states, particularly those that have seen recent coronavirus flare ups.

 So what?

The headline figures in today's June reading of the ISM non-manufacturing index rose at a record one-month pace — but not without substantial caveats. The index – a measure of activity in the service sector, representing about 2/3 of the U.S. economy – rose 11.7 points from May to a reading of 57.1, a level indicative of expansion. And a subindex measuring whether business activity is growing or contracting showed a similarly strong increase. This is undoubtedly good news for both the service sector and the broader economy, especially after two months of contraction. But the increase in the index only proves that the service sector merely improved in June from May – it does not suggest that the broader sector is back to where it was prior to the coronavirus outbreak. And a strong improvement in this index was expected given how much of the economy was still shuttered even at the end of May. A separate read on the service sector from data firm IHS Markit concluded that the service sector continued to contract in June, even as most of the country had begun to open up. So while it's good news that the service sector is either improving or at least close to doing so, there's clearly still a long way to go before it's back to anything close to "normal."

The monthly jobs report includes a seldom-reported diffusion index that some view as a proxy for how many industries are hiring in a given month (though the true definition of the index is more complicated than that). In June, this index rose sharply to 75.2 – up from a historic low of 4.3 in April and the highest level since 1997 – suggesting that a majority of industries are actively hiring. But the employment subindices in both the June ISM manufacturing and non-manufacturing (services) reports show that hiring activity in both sectors continues to contract. While the separate indices have differing specifications, they often move together, making the recent disconnect more notable. The difference might be explained by the fact that respondents to the ISM surveys don't view people returning from temporary layoff as an increase to overall employment, whereas the broader jobs report does. If that's the case, that would suggest that most of the increased hiring in recent months has been people reconnecting with their former employer, rather than finding new jobs, and that overall demand for labor remains weak — a finding consistent with other reports. Recent research from the National Federation of Independent Business showed that small businesses cut employment at a higher rate in June than they did in May, in part because of conditions stipulated in loans acquired through the Paycheck Protection Program.

According to Goldman Sachs, states home to almost 60% of the nation's population have either placed their reopening plans on hold or are actively tightening restrictions as a result of a recent outbreak. Three weeks ago, more than 90% of the population lived in areas that were actively reopening. Both the retreats and consumers' reactions to them have stunted the recovery for many sectors, especially the restaurant industry. Sales in restaurants were climbing, but have recently begun to sputter in many states, particularly in those with a strong surge in case volumes — gloomy news for the restaurant industry, which employs about 15 million workers nationwide. And a report from Bloomberg and Morning Consult suggests that even after stay-at-home orders are lifted, most Americans are unlikely to feel compelled to visit common social venues, like restaurants, sporting events, concerts and, especially, bars. According to the survey, half of the respondents expressed no interest at all in going to a bar once things open back up. The survey highlighted similar resistance – due to both health and economic factors – to visiting a mall or buying certain products. This ongoing apprehension poses significant risks to the recovery of the U.S. economy, which relies heavily on consumer spending on products and services.

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