The ISM Non-Manufacturing Index released on Thursday fell to 48.7 from 50.6 and this was the second consecutive monthly decline. This drop back into contraction territory raised questions about the strength of the recovery and the possible implications for the Non-Farm Payrolls Report on Friday.
The employment component was especially bad at 41.6 and the second month in the 41 range. Order backlogs dropped 5 points to 48.5 and back into contraction territory. The business activity index also fell 5 points to 49.6 and back into contraction.
Granted economic charts do not always go in a straight line but investors had hoped the services sector would be leading us out of the recession. 20 years ago the manufacturing sector accounted for 22% of the GDP. Today that is only 9% and the services sector, which now makes up almost 90% of the economy, has taken the lead in new business creation.
Tight credit conditions and pessimism over the staying power of the rebound were cited as the major negatives.
ISM Services Chart
The ISM report suggested that crude demand would continue weak and presented a bearish picture for an oil prices with rising inventory levels. The +2.1 million barrel build announced on Wednesday was the largest increase since mid-September. Gasoline supplies are exploding in size with a 4 million barrel increase last week.
If services businesses are slowing then gasoline demand may be slowing as well since service businesses typically consume more fuel in the course of their operations. The weak ISM added worry about Friday's jobs report and investors lightened up on crude holdings just to be safe.
Crude Futures Chart
Crude prices were holding just under support at $76 in afterhours trading on Thursday. This is a critical level and break here could see a retest of strong support at $70. Inventories are high, demand is low and winter weather has yet to reach the states with heavy heating oil use. This would be the place for oil to rebound but I would be a hesitant buyer until after the payroll report on Friday.