In today's only major economic release in Canada and the United States, the U.S. ISM non-manufacturing index increased to 52 in April from 49.6 in March contrary to market expectations calling for a slight drop in the index.

The business activity index dropped 1.3 points to 50.9. However, it still remained above the 50 threshold, indicating expanding activity in the sector. The employment index increased to 50.8 in April from 46.9 in March, reinforcing the non-farm payrolls data, which showed a 90,000 job gain in the services sector. The new orders index dipped slightly to 50.1 from 50.2. The new export orders index fell 6.5 points to 48.5. The prices index increased to 72.1, a high since November 2007.

The level of the overall index in April is historically consistent with GDP growth of around 2% on an annualized basis. The earlier-released ISM manufacturing survey for April is also pointing to positive growth in the economy. As well, the business activity index, which correlates as well with real GDP growth as the non-manufacturing index, has remained consistently above the 50 boom/bust mark for three straight months after its peculiar collapse in January. These factors suggest some upside risk to our forecast calling for a contraction in second-quarter GDP growth. However, with confidence depressed, employment declining and gas-prices sky high, it is clear that considerable headwinds are still facing the U.S. economy.

Rishi Sondhi, Economist, rishi.sondhi@rbc.com