Service sector activity rises in July

The Institute for Supply Management’s composite services index rose to 56.7 percent in July, up 1.4 points from 55.3 percent in the previous month. The index remains above neutral and indicates the services sector has expanded for the 26th consecutive month (see above first chart). However, many participants’ comments were cautious as price and employment pressures persist and signs of weak demand begin to accumulate.

Among the main components of the Services Composite Index, the Business Activity Index rose 3.8 points to 59.9 (see top of the first chart). This is the 26th month above 50. 13 industries reported increased activity while four industries reported slower activity.

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

The non-manufacturing export orders index, a separate indicator that measures export orders only, also improved in July, reaching 59.5 percent compared to 57.5 percent in June. Six industries reported growth in export orders, matching the decline of the six reports and six reported no change. However, for all respondents, only 21 percent said they perform and track a separate activity outside the United States.

Backlogs in the services sector likely grew again in July although the pace likely slowed as the index fell to 58.3 percent from 60.5 percent. It was July 19The tenth A month in a row with backlogs. Nine industries reported increases in backlogs in July, while five industries recorded decreases.

The employment index for services improved in July but remained below the neutral 50, recording 49.1 percent, up from 47.4 percent in June. This is the fourth time in the past six months that the Employment Index has been below neutrality (see bottom of the first chart). The weak reading reflects a lack of supply, not a lack of demand.

Eight industries recorded growth in employment while seven industries recorded a decrease. Respondents point out that a shortage of qualified labor persists and that competition remains intense.

Supplier deliveries, a measure of delivery times for suppliers to non-manufacturers, came in at 57.8 percent, down from 61.9 percent in the previous month (see top of the second graph). He notes that suppliers are further behind in delivering supplies to the service business, but the slide has slowed from the previous month. The index has fallen sharply since consecutive readings above 75 in October and November 2021 and is at its lowest level since January 2021. The manufacturing sector survey matches the recent improvement (see upper part of second chart). For the services sector, 14 industries reported slower deliveries in July while none recorded any faster deliveries.

The index of non-manufacturing prices paid fell to 72.3 in July, the third consecutive decline from a record high of 84.6 percent in April (see bottom of second chart). 16 industries reported paying higher input prices in July. Price pressures have subsided somewhat for both the services and manufacturing sectors but remain severe (see bottom graph two). The latest report from the Institute for Supply Management indicates that the services sector and the broader economy marked the 26th consecutive month in July. Survey respondents continue to highlight persistent input price pressures, as well as material and labor shortages. Survey respondents also cited some indications of declining demand and concern about the economic outlook.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after more than 25 years researching financial and economic markets on Wall Street. Previously, Bob was Head of Global Equity Strategy for Brown Brothers Harriman, where he developed an equity investment strategy that combines top-down macro analysis with upward fundamentals.

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

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