US Service Sector Remains Robust, But Hiring Weakness Persists

Economic activity in the services sector continued to expand in July, with the Services PMI registering 54.1%, the 25th consecutive month in expansion territory, according to the Institute for Supply Management Services PMI Report.

That's consistent with 2.5% GDP growth, but they also suggest there is a lack of appetite to hire workers. Friday's jobs report may also be dampened by the conclusion of the FIFA World Cup impacting leisure & hospitality. Another soft outcome would weigh on Fed rate hike expectations, James Knightley, chief international economist, ING.

Key numbers from the services report:

• Business Activity Index remained in expansion, increasing 3.7 percentage points to 59.1%.
• The New Orders Index also was very firm at 57.2 versus 55.1 previously, but the backlog of orders dropped to neutral and employment headed back into contraction territory at 47.4 from 51.2.
• Inflation pressures remain elevated though with prices paid up at 70.3, a touch above the six-month average of 69.0. The increase here may well be tied to the timing of the survey, Knioghtley says, which was conducted as the Middle East deal broke down and oil prices spiked higher, given that within the index there were six categories described as experiencing price falls versus only three in the previous survey.
• The Employment Index returned to contraction territory after
  only one month in expansion with a reading of 47.4%, a 3.8-percentage point decrease from the 51.2% recorded in June. Businesses remain very reluctant to hire workers and that hints at some caution on the outlook. 
• The Supplier Deliveries Index registered 52.8%, 1.6 percentage points lower than the 54.4% recorded in June. This is the 20th consecutive month that the index has been in expansion territory,
  indicating slower supplier delivery performance. (Supplier Deliveries is the only ISM PMI Reports index that is inversed; a reading of above 50% indicates slower deliveries, which is typical as the economy improves and customer demand increases.)
• The Prices Index registered above 70% for the fourth time in five months; the reading of 70.3% in July is 2.6 percentage points above June’s figure of 67.7 percent. The index has exceeded 60
  percent for 20 straight months and increased its 12-month average by 0.1 percentage point to 68.1%, its highest since April 2023.

There was continued easing of the Supplier Deliveries Index, and eight commodities were listed as in short supply, down from nine in June. Technical labor and memory components continue to have supply challenges, and some respondents mentioned such tactics as extending ordering windows to accommodate longer lead times for other difficult-to-get commodities. Copper and aluminum moved from those listed as up in price to down in price.

Tariff impacts and the Middle East conflict continued to be mentioned by respondents, but much less frequently than in prior reports. The World Cup was again cited in the comments regarding increased business activity and new orders.

Overall, the U.S. services economy continues to be resilient. Concerns
still exist regarding mortgage and inflation rates, and we are still in the midst of pricing impacts due to the recent run-up in petroleum costs.