U.S. Services Sector Maintains Growth, Prices Jump in July

The U.S. services sector demonstrated continued expansion in July, as the Institute for Supply Management's (ISM) Non-Manufacturing Index edged up to 54.1 from 54.0 in June. This reading, though slightly below the consensus forecast of 54.5, indicates ongoing growth in the services industry, as any figure above 50 signifies expansion. The sector has shown resilience throughout the year, with the index consistently above 53.0 for eight consecutive months—a streak not seen since 2022.

Underlying activity metrics presented a mixed picture for the month. The Business Activity Index saw a notable increase to 59.1 from 55.4, while the New Orders Index also rose to 57.2 from 55.1. Both forward-looking indicators have now registered expansion for twelve consecutive months, suggesting sustained demand within the services sector. Thirteen of the eighteen major service industries reported growth in July, with four indicating contraction and one showing no change.

Despite the overall expansion, concerns emerged regarding inflation and employment. The Prices Paid Index surged to 70.3 in July from 67.7 in June. This marks the fourth time in the past five months that this index has surpassed 70.0, underscoring persistent inflationary pressures, albeit still below the peaks observed during the COVID-related supply chain disruptions. Geopolitical events, specifically the conflict in the Middle East, are anticipated to influence input prices in the short term. Meanwhile, hiring efforts in the services industry slowed, with the Employment Index declining to 47.4 from 51.2, suggesting that companies are becoming more cautious about expanding their workforces.

The broader economic landscape reflects these complexities. While increased business activity, partly buoyed by events like the World Cup, supported expansion, the resurfacing of supply-chain concerns linked to the Middle East conflict has tempered the near-term economic outlook. This diminished confidence appears to have contributed to the pullback in service sector hiring. On the employment front, ADP reported a gain of 44,000 in private payrolls for July, falling short of the anticipated 65,000. Projections for the official nonfarm payroll report anticipate a gain of 90,000, with the unemployment rate holding steady at 4.2%.

Key terms:

1. ISM Non-Manufacturing Index: An economic indicator based on a monthly survey of purchasing and supply executives across 18 non-manufacturing industries, reflecting the health and sentiment of the U.S. services sector.

2. Prices Paid Index: A component of the ISM reports that measures the change in prices paid by businesses for goods and services, indicating inflationary pressures within the economy.

3. M2 Money Supply: A broad measure of the money supply that includes cash, checking deposits, savings deposits, money market accounts, and other liquid assets, often monitored for its potential impact on inflation.

Source: This article is adapted from First Trust Portfolios' Data Watch commentary on this data release. The original is available at ftportfolios.com.