Services-Sector Expansion Slowed in July

By Robert Hughes

The Institute for Supply Management’s (ISM’s) nonmanufacturing index pulled back to 53.7 percent in July from 55.1 in June, the lowest reading since August 2016 (see top chart). For this index, 50 is neutral, with readings above 50 suggesting expansion and readings below 50 suggesting contraction. Typically, the index ranges between 50 and 60, with dips below 50 during recessions. Historically, readings above 48.6 percent have suggested expansion of the overall economy. The July result is the 114th consecutive reading above 50 percent and the 120th month above 48.6 percent.

Among the key components of the index, the business-activity index (equivalent to the production index in the ISM manufacturing report) was 53.1 percent in July, making July the 120th consecutive month above 50 (see bottom chart). In July, nine industries in the nonmanufacturing survey reported growth while six reported a decrease in activity.

The nonmanufacturing new-orders index came in at 54.1 percent, down from 55.8 in June. July was the 120th month of readings above 50 (see bottom chart). The new-export-orders index, a separate index that measures only orders for export, was 53.5 percent in July and has been above 50 for 30 consecutive months.

The nonmanufacturing employment index increased slightly to 56.2 in July, versus 55.0 in June, and has been expanding for 65 consecutive months. Eleven industries reported expanding employment in July while four reported contraction.

Supplier deliveries, a measure of delivery times for suppliers to non-manufacturers, came in at 51.5, unchanged from June. It suggests suppliers are falling farther behind in delivering supplies to non-manufacturers, but the slippage is about the same as the prior month. Respondents to the survey point to labor shortages as a primary reason for increasing delays in deliveries.

Prices for input materials and services rose for the 26th month as the price index posted a reading of 56.5 in July versus 58.9 in June. Tariffs and erratic trade policy complicate the outlook for input-cost pressures and, in conjunction with a tight labor market and rising wages, suggest continued pressure on profit margins.

Today’s report from the ISM suggests the nonmanufacturing sector continued to grow in July but at a slower pace. Despite a pullback in the latest month, positive readings for new orders, activity, and employment suggest a modestly positive outlook for the services sector. The results are consistent with a range of economic data that point to continued but uneven growth.

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Robert 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.