ISM: US Services Sector Back in Growth in July After Unexpected Slip Back into Contraction in June; April-July Average Moderates to Early 2020 Pandemic Slump

–ISM Services Index at 51.4 Vs. 48.8 in June Vs. Median Forecast 51.0
–Business Activity, New Orders, Employment All Rebound
–Prices Paid Index Remains Elevated at 57 but Has Eased from Above 70, 80 in 2021 and Parts of 2022

By Max Sato

(MaceNews) – The U.S. services sector rebounded largely as expected In July, backed by a return to growth in activity/production, new orders and employment, after unexpectedly slipping into contraction in June, but its April-July average performance is the weakest since the onset of the pandemic amid sticky costs, high interest rates and uncertainty over the U.S. election, according to the latest survey by the Institute for Supply Management (ISM) released Monday.

The ISM index, which shows the directional change of economic activity, rose 2.6 percentage points to 51.4 in July after falling 5.0 points to 48.8 in June, which was the lowest since 45.4 in May 2020 (the sharpest fall since the 6.2-point drop in December 2022), and rising 4.4 points to a nine-month high of 53.8 in May. The services sector had been in growth territory for 15 straight months until March this year. It is not unusual for the sector to fluctuate between June and July.

The index came in just above the median economist forecast of 51.0 but below its 12-month average of 51.9. From a historical viewpoint, the April-July index average has drifted lower to 50.9 this year from 52.4 in 2023, 57.3 in 2022 and 63.2 in 2021 and hit the weakest since 50.3 in 2020. Beyond that, it is the lowest since 45.4 in 2009, when global demand plunged in the aftermath of the U.S. credit crisis.

“The increase in the composite index in July is a result of an average increase of 5 percentage points for the business activity, new orders, and employment indexes, offset by the 4.6-point drop in the supplier deliveries index,” Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. “Survey respondents again reported that increased costs are impacting their businesses, with generally positive commentary on business activity being flat or expanding gradually.”

“Comments continued to express a wait-and-see attitude regarding the upcoming presidential election, with one respondent expressing concern over potential increases in tariffs,” he said. “Many panelists noted a return to more stable supply chain performance, albeit with higher costs.”

Miller told reporters that the industries with significant working capital (utilities), those sensitive to interest rates (real-estate, rental and leasing) and with investment assets should benefit from an expected rate cut by the Federal Reserve. Some of the activity that has been driving the utilities is AI (artificial intelligence) business but if there is a pullback in AI, credit easing would support the utilities industry, he said.

But he also warned that some firms that provide support services to the U.S. manufacturing sector could be hurt as the sector was in contraction for a fourth straight month in July on lingering sluggish demand as firms remain reluctant to invest in capacity, amid elevated borrowing costs, and resorting to layoffs to tide over what appears to be a protracted trough. Among the firms already hit is the chipmaker Intel, which announced last week that it was reducing more than 15% of its workforce, or about 17,500 people.

The construction, finance & insurance industry and utilities have been consistently strong over the last four months while the real estate, rental & leasing industry has been in contraction in the past two months, Miller said. Shifting from contraction to growth in July is transportation & warehousing, which was a little surprising, given that wholesale trade and retail trade have been in contraction in the last two to three months, he said.

Last month, the June ISM services report showed a seasonally unusual decline in business activity at real estate, rental & leasing firms and a drop in employment at hotels and food services, entertainment and recreation.

“As was the case in June, restaurant sales and traffic remain flat compared to last year,” a firm from the accommodation and food services category told the ISM July survey. “A heat wave in California, rising gas prices and general angst about menu prices have tempered consumer demand.”

“Due to the election year, new projects are not moving forward as expected,” an information service provider said. “Many of our customers are waiting for the election results to develop new projects.”

Of the four sub-indexes that directly factor into the services PMI, the business activity/production index rose 4.9 points to 54.5 in July after plunging 11.6 points (the sharpest fall since the 22.9-point drop in April 2020) to 49.9 in June, hitting the lowest since 41.2 in May 2020. It followed a 10.3-point jump to an 18-month high of 61.2 in May and a 6.5-point fall to a nearly four-year low of 50.9 in April, which was also the lowest since May 2020.

The new orders index rose 5.1 points to 52.4 in July after falling 6.8 points to 47.3 in June, which was the first contraction since December 2022, when it slumped 10.2 points to 45.0. It followed a 1.9-point rise to 54.1 in May and a 2.2-point dip to a 16-month low of 52.2 in April. 

The employment index returned to growth after indicating contraction in the previous five months. It rose 5.0 points to 51.1 after dipping 1.0 point to 46.1 in June and rising 1.2 points to 47.1 in May. Most of the comments from the surveyed firms in July showed “flat or not rehiring vacated positions,” which was not so negative in terms of layoffs and hiring freezes, indicating conditions are close to a breakeven point, Miller said.

The supplier deliveries index — the only ISM index that is inversed — fell 4.6 point to 47.6 in July, showing “faster” deliveries as the supply chain appears to have recovered from the long lead times during the pandemic. The index fell 0.5 point to 52.2 in June and rose 4.2 points to 52.7 in May, when it popped above 50 for the first time in four months and thus indicated that supplier delivery performance was “slower” after being “faster.”

Earlier this year, the index dipped 3.5 points to a record low of 45.4 in March, which was the fastest deliveries since July 1997, when the ISM began tracking them. A reading of above 50 indicates slower deliveries. That tends to happen when the economy improves and customer demand picks up, but in this case, it is mainly due to recent bad weather and trouble booking containers.

In January, deliveries were delayed by bad weather in some U.S. regions, the impact of attacks in the Red Sea, which prompted shipping firms to avoid the Suez Canal in Egypt, as well as congestion at the drought-hit Panama Canal, a key route for cargo going between Asia and the U.S. East Coast.

Among other subindexes, the prices paid index remains elevated but has eased from above 70 and 80 seen in 2021 and parts of 2022. It rose 0.7 point to 57.0 in July after falling 1.8 points to 56.3 in June and slipping 1.1 points to 58.1 in May. The index fell 5.2 points to a four-year low of 53.4 in March, which was the lowest since 50.4 in March 2020 and well below its record high of 83.8 hit in March 2022. The index has been above the neutral line of 50 for seven years since 49.6 in May 2017.

The inventories index rose 6.9 points to 49.8 in July after slumping 9.2 points to 42.9 in June (the lowest since 42.2 in October 2021), falling 1.6 points to 52.1 in May and surging 8.1 points to 53.7 in April. Comments from respondents in July include: “Intentionally working down inventory” and “Extreme drought conditions halted fertilizer top-dress on corn, beans and hay crops.”

The index for backlog orders, which is tied directly to efficiency in the upstream of supply chains, rebounded 6.6 points to 50.6 in July after falling 6.8 points to 44.0 in June and edging down 0.3 point to 50.8 in May. It remains above 40.9 in May 2023, which is the lowest since 46.4 in May 2009.

The new export orders index for the services sector that relies heavily on domestic demand remains volatile, rising 6.8 points to 58.5 in July after slumping 10.1 points to 51.7 in June, soaring 13.9 points to an eight-month high of 61.8 in May and slipping 4.8 points to a six-month low of 47.9 in April. Respondent comments in July include: “Continuing and steady increase in business in Europe and Asia” and “New projects in emerging markets like Colombia and Brazil have provided the company with new business opportunities, while projects in the U.S. have remained steady.”

Share this post