Service sector activity picks up in July

The Institute for Supply Management Composite Service Index rose to 56.7% in July, up 1.4 points from 55.3% in the previous month. The index remains above the neutral level and points to the growth of the services sector for the 26th month in a row (see the top of the first chart). However, many of the participants’ comments were cautious as price and labor pressures continue and signs of weakening demand begin to build up.

Among the key components of the Composite Services Index, the PMI added 3.8 points to 59.9 (see top of chart one). This is the 26th month above 50. Thirteen industries reported increased activity while four reported lower activity.

The index of new orders in the services sector rose to 59.9% from 55.6% in June, up 4.3 percentage points. July was the best result since March (see the bottom of the first chart). The new orders index has been above 50 percent for 26 consecutive months.

The Non-Manufacturing New Export Orders Index, a separate index that measures only export orders, also improved in July to 59.5% from 57.5% in June. Six industries reported an increase in export orders, six of which reported a decrease and six reported no change. However, of all respondents, only about 21% said they carry out and monitor certain activities outside the United States.

Backlogs in the services sector likely rose again in July, although the pace is likely to have slowed as the index slipped to 58.3 percent from 60.5 percent. July was the 19thth month in a row with a growing backlog. Nine industries reported an increase in backlogs in July, while five reported a decline.

The Service Employment Index improved in July but remained below the neutral 50 at 49.1% from 47.4% in June. This is the fourth time in the past six months that the employment index has been below neutral (see the bottom of the first chart). A weak value reflects a lack of supply rather than a lack of demand.

Eight industries reported an increase in employment, while seven reported a decline. Respondents suggest that skilled labor is still in short supply and competition remains high.

Supplier Deliveries, a measure of supplier delivery time to non-manufacturing businesses, was 57.8% compared to 61.9% in the previous month (see top of Chart 2). This suggests that suppliers are even further behind in delivering goods for the service industry, but the backlog has slowed compared to the previous month. The index has declined sharply since hitting over 75 in October and November 2021 and is at its lowest level since January 2021. The manufacturing sector survey is in line with the recent improvement (see top of second chart). In the service sector, fourteen industries reported slower deliveries in July, while none reported faster deliveries.

The non-manufacturer price index fell to 72.3 in July, the third consecutive decline since April’s record high of 84.6 percent (see bottom of chart two). Sixteen industries reported higher resource prices in July. Price pressure has eased somewhat in both the services and manufacturing sectors, but remains intense (see bottom of Chart 2). The latest report from the Institute for Supply Management says that the service sector and the broader economy expanded in July for the 26th straight month. Survey respondents continue to highlight continued resource price pressures, as well as shortages of materials and labor. Respondents also noted some signs of weakening demand and concerns about the economic outlook.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after over 25 years of economic and financial market research on Wall Street. Bob previously led the Global Equity Strategy division of Brown Brothers Harriman, where he developed an equity investment strategy that combines macro downside analysis with upside fundamentals.

Prior to joining BBH, Bob was Senior Equity Strategist at State Street Global Markets, Senior Economic Strategist at Prudential Equity Group, and Senior Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business from Lehigh University.

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