Activity in the service sector resumes in July

The Institute for Supply Management’s Composite Services Index rose to 56.7% in July, up 1.4 points from 55.3% the previous month. The index remains above neutral and suggests a 26th consecutive month of expansion for the services sector (see top of first chart). However, many of the participants’ comments were cautious as price and labor pressures continue and signs of weakening demand begin to build up.

Among the key components of the composite services index, the entrepreneurial activity index gained 3.8 points to 59.9 (see the top of the first chart). This is the 26th month above 50. Thirteen industries reported increased activity while four reported slower activity.

The new service orders index rose to 59.9% from 55.6% in June, an increase of 4.3 percentage points. July was the best result since March (see bottom of first graph). The new orders index has been above 50 percent for 26 consecutive months.

The Non-Manufacturing New Export Orders Index, a separate index that measures only export orders, also improved in July to 59.5 from 57.5 percent in June. Six sectors recorded growth in export orders, corresponding to the six reported declines and six did not report any changes. However, for all respondents, only about 21% said they carry out and monitor separate activities outside the United States.

Order backlogs in the services sector likely picked up again in July, although the pace likely slowed as the index dropped to 58.3% from 60.5%. It was July 19thth Month in a row with arrears increasing. Nine sectors reported higher arrears in July, while five reported decreases.

The employment index in services improved in July but remained below the neutral level 50, standing at 49.1%, up from 47.4% in June. This is the fourth time in the past six months that the employment index has been below neutral (see bottom of first graph). The weak reading reflects the lack of supply rather than the lack of demand.

Eight sectors recorded employment growth while seven reported a reduction. Respondents suggest that skilled labor continues to be in short supply and competition remains intense.

Supplier deliveries, a measure of delivery times for suppliers to non-producers, came in at 57.8%, down from 61.9% the previous month (see top of second graph). It suggests that suppliers are further behind in delivering supplies to service businesses, but the slippage has slowed from the previous month. The index has moved sharply down from consecutive reads above 75 in October and November 2021 and is at its lowest level since January 2021. The manufacturing survey matches the recent improvement (see top of second chart). For the service sector, fourteen industries reported slower deliveries in July, while none reported faster deliveries.

The non-manufacturing sector price paid index fell to 72.3 in July, the third consecutive decline from a record 84.6% in April (see bottom of second chart). Sixteen industries reported paying higher prices for inputs in July. Price pressures have eased slightly for both services and the manufacturing sector, but remain intense (see bottom of second chart). The latest report from the Institute of Supply Management suggests that the services sector and the economy in general expanded for the 26th consecutive month in July. Survey respondents continue to highlight continued input pricing pressures, as well as shortages of materials and labor. Respondents also noted some signs of easing in demand and concern for the economic outlook.

Robert Hughes

Bob Hughes

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

Prior to BBH, Bob was Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist at Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a business degree from Fordham University and a business degree from Lehigh University.

Receive notifications on new articles by Robert Hughes and AIER.