The US service sector surprises with momentum; Supply and reduce price pressures

  • The services PMI rose 1.4 points to 56.7 points in July
  • New orders arrive strongly; Prices record biggest drop since 2017
  • improve the measurement of employment; persistent shortage of workers

WASHINGTON (Reuters) – The U.S. service industry unexpectedly rebounded in July as new orders grew strongly, supporting views that the economy is not in a recession despite lower production in the first half.

Wednesday’s Institute for Supply Management (ISM) survey also showed that supply bottlenecks are easing while the measure of prices companies pay has fallen by the most since 2017, benefiting in part from lower commodity prices. But labor shortages persisted, especially for truck drivers.

“Obviously the best days of recovery are in the back-mirror, but that doesn’t mean the downturn has begun,” said Oren Klashkin, chief US economist at Oxford Economics in New York. “The fundamentals are strong enough to prevent a recession this year, although the opportunity for a soft landing narrows.”

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The ISM Non-Manufacturing PMI rebounded to a reading of 56.7 last month from 55.3 in June, ending three consecutive monthly declines. Thirteen industries, including mining, public administration and wholesale trade, registered growth. But agriculture, forestry, fishing and hunting, as well as retail, finance and insurance, contracted.

Economists polled by Reuters had expected the non-manufacturing PMI to fall to 53.5. A reading above 50 indicates expansion in the service sector, which accounts for more than two-thirds of US economic activity.

The sudden recovery came on the heels of Monday’s ISM manufacturing survey which showed factory activity slowed moderately last month. That was in stark contrast to an S&P Global survey that showed the services sector contracted in July.

The government reported last week that the economy contracted by 1.3% in the January-June period.

He blames it largely on extreme fluctuations in inventories and trade deficits linked to faltering global supply chains. However, the overall economic momentum slowed as the Federal Reserve aggressively tightened monetary policy to fight inflation.

“ISM activity corresponds to GDP growth of nearly 2% annually, rather than the outright declines experienced in the first half of the year,” said Michael Pierce, chief US economist at Capital Economics in New York. “With borrowing costs down from their peak in June, and lower gasoline prices likely to drive up real disposable income, the immediate outlook for services looks a bit brighter.”

National average gasoline prices fell from more than $5 a gallon in July to $4.16 on Wednesday, according to AAA.

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. Most US Treasury yields rose to two-week highs.

weak spots appear

The ISM’s measure of new orders received by service companies rose to 59.9 from 55.6 in June. Firms recorded an increase in exports.

Services activity is supported by a shift in spending from goods. But signs of weakness are increasing.

Accommodation and food service companies reported that “restaurant sales have been declining in the past few weeks.” Companies in corporate governance and the support services sector said they could “feel the economy weak”, and that “customers are taking appropriate steps in anticipation of a recession.”

Retailers said they are “in a position to reduce inventory, trying to match inventory levels with current lower sales trends.” In the public administration sector, there was “pressure from the labor market shortage of qualified workers for increased wages and other benefits”.

The ISM service industry employment gauge improved to 49.1 from 47.4 in June, the lowest reading since July 2020. Despite declining demand for workers in industries such as construction and wholesale and retail trade, labor shortages remain. According to the survey, companies reported that, with “staff turnover, it takes longer to locate backfilling and onboarding preparations.”

Companies also said they were having “difficulties recruiting new candidates as we lose more people retiring or leaving the company in search of new opportunities.”

On Tuesday, the government reported that there were 10.7 million jobs at the end of June, with 1.8 for every unemployed person. Read more

The survey’s measure of supplier deliveries fell to 58.3 from 61.9 in June, helping to slow the pace of the increase in service inflation. A reading above 50 indicates slower deliveries. Late orders have also been reduced.

Goods such as appliances, computers, electrical components, paper products, as well as needles and syringes remained in short supply.

The measure of prices that service industries pay for inputs fell to 72.3, the lowest reading since February 2021, from 80.1 in June. The 7.8 percentage point drop was the largest since May 2017. This, along with the moderation of prices at the factory gate in July, indicates that inflation has likely peaked. Read more

said Shannon Serry, an economist at Wells Fargo in New York.

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama

Our Standards: Thomson Reuters Trust Principles.

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