September 3, 2020 Reading Time: 2 minutes

The Institute for Supply Management’s services index posted a 1.2 percentage-point decrease in August, dropping to a reading of 56.9 from 58.1 in the prior month. The latest results follow a record surge in June and two consecutive months below the neutral 50 threshold including a record monthly decline in April (see top chart). The results indicate a third month of expansion for the services sector and the broader economy, though the pace likely eased from the snapback results of June and July.

Among the key components of the services index, the business-activity index (comparable to the production index in the ISM manufacturing report) fell to 62.4 in August, down from 67.2 in July (see top chart). For August, 13 industries in the services survey reported expansion.

The services new-orders index fell to 56.8 from 67.7 in July, a drop of 10.9 points (see bottom chart). Twelve industries reported expansion in new orders in August. The new-export-orders index, a separate index that measures only orders for export, was 55.8 in August, versus 49.3 in July. Five industries reported growth in export orders.

Backlogs of orders in the services sector likely rose as the index increased slightly to 56.6 percent from 55.9 percent. Backlogs of orders have grown for three consecutive months with eight industries reporting higher backlogs in August.

The services employment index came in at 47.9 in August, up from 42.1 in July and the 6th month below neutral. Employment remains one of the weaker areas of the economy. Despite the large gains in jobs over the last few months, high levels of initial claims for unemployment insurance and extremely high levels of continuing claims for unemployment insurance suggest complete economic recovery is likely a long way off.

Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 60.5, up from 55.2 in the prior month. It suggests suppliers are falling further behind in delivering supplies to services businesses, and the slippage has accelerated from the prior month. Typically, slower deliveries are consistent with a strong economy but in this environment, the slower deliveries may be partially a result of production constraints and transportation difficulties. Sixteen industries reported slower deliveries in August.

The latest report from the Institute of Supply Management suggests that the services sector and the broader economy expanded in August but at a slower pace.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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