Recent surveys released on Monday have unveiled a complex landscape for the US services sector in July. The data from the Institute for Supply Management (ISM) indicates an unexpected expansion in activity, contrasting with findings from S&P Global, which pointed towards a slight deceleration in growth.
The ISM's Purchasing Managers' Index (PMI) rose to 51.4 in July, climbing from 48.8 in June, surpassing expectations set by analysts who predicted a reading of 51 according to a Bloomberg survey. This latest figure marks the fifth instance this year where the index remains within expansion territory, a critical threshold since values below 50 denote contraction in the services sector.
Additionally, the average for the past 12 months has settled at 51.9, suggesting a consistent pattern of moderate growth. A notable increase in business activity, new orders, and the employment index has driven this expansion. Steve Miller, chair of the ISM's services business survey committee, commented on the current business climate: "Survey respondents again reported that increased costs are impacting their businesses, with generally positive commentary on business activity being flat or expanding gradually." Within the survey, 10 out of 18 service industries reported growth last month while eight indicated declines.
The business activity or production index experienced a significant uptick, soaring to 54.5 in July from 49.6 in the previous month. New orders also witnessed a rise, advancing to 52.4 from 47.3, while the employment index gained momentum, escalating to 51.1 from 46.1, marking its first expansion since January, as revealed in the report.
Additionally, the suppliers deliveries index saw a shift to 47.6, down from 52.2, which suggests faster delivery times—a critical factor for operational efficiency. It's important to note that the previous occurrence of faster deliveries occurring concurrently with expansions in business activity, new orders, and employment took place in November 2023, noted Miller.
On a separate note, S&P Global's services PMI indicated a slight decline, falling to 55 in July from 55.3 in June, even as new orders experienced an uptick. This reading fell short of the consensus prediction of 56 compiled by Bloomberg. Moreover, S&P Global's US composite PMI output index dropped to 54.3 last month, down from 54.8 in June.
Nonetheless, the index still signifies a robust monthly expansion in private sector business activity. Chris Williamson, chief business economist at S&P Global Market Intelligence, provided an insightful perspective: "The PMI surveys bring encouraging news of a welcome combination of solid economic growth and cooler selling price inflation in July.
Another strong expansion of business activity in the service sector, which over the past two months has enjoyed its best growth spell for over two years, contrasts with the deteriorating picture seen in the manufacturing sector, where output came close to stalling in July." This week, the ISM reported a deeper contraction in the US manufacturing sector for July, while the S&P Global data indicated a negative trend in activity.
This juxtaposition of strong services performance alongside weakening manufacturing raises important questions for investors and economists alike, prompting a closer look at the underlying factors influencing these divergent trends in the economy..