A key measure of U.S. economic growth ticked lower by a scant one-tenth of 1% in February, indicating the economy is expanding despite the Federal Reserve raising lending rates eight times in the past year. But the good news may be bad because it raises doubt about how many more rate hikes will be required to tamp down growth enough to quash inflation without causing a recession.
The index of activity in the service sector of the economy, which accounts for 89% of U.S. gross domestic product, dropped negligibly last month, according to data released Friday by the Institute of Supply Management, a trade association for purchasing managers at large companies.
An index level of 49.9% or less indicates the economy is expanding, while a persistent reading below 49.9% indicates an economic contraction may be on the way. The ISM Services index dipped to 49.6% in December but rebounded sharply in January. February’s minimal decline indicates the economy is still expanding briskly.
The ISM Services index is based on a monthly survey of purchasing executives at large companies. It’s modeled after the ISM‘s monthly index of activity in the manufacturing sector, which has been conducted for many decades. After services became a larger influence on the economy than manufacturing, the ISM began publishing the services index.
The ISM service and manufacturing indexes are composites of 10 sub-indexes, and a key sub-index measures new orders. The new orders sub-component of the services index rose from 60.4% in January to 62.6% in February, which indicates strong growth is just ahead in the next few weeks.
The growth exhibited by the economy has made Wall Street investors nervous that rate hikes by the Federal Reserve are not slowing economic growth enough to squash inflation. The eight rate hikes since March 2022 represent one of the most aggressive monetary tightening campaigns since the creation of the modern Federal Reserve System in 1913.
A survey of Federal Open Market Committee members, who determine the Fed funds rate, has indicated two more quarter-point rate hikes were likely in March and April. However, if economic growth continues to be stronger than expected and the inflation rate does not come down enough to satisfy central bankers, the Fed may opt to hike rates three more times and maintain higher lending rates longer.
The S&P 500 stock index closed Friday at 4045.64, up +1.61% from Thursday, and +1.90% from a week ago. Stock prices had declined in recent weeks because economic growth, despite aggressive monetary policy, made Wall Street worry that the Fed would cause a recession by tightening rates too much. Most recessions are caused by a Fed policy mistake. The nervousness on Wall Street over Fed policy is likely to continue to dog the stock market for months.
The S&P 500 index is up +80.82% from the March 23, 2020, bear market low and down -15.66% from its January 3, 2022, all-time high.
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