(Bloomberg) -- The US services sector expanded in July after contracting a month earlier by the most in four years, which may help allay fresh concerns about an abrupt downturn in the economy.
The Institute for Supply Management’s index of services rose 2.6 points to 51.4. Readings above 50 indicate expansion, and the July figure was slightly firmer than the median projection in a Bloomberg survey of economists.
The gauge was boosted by rebounds in services employment, orders and business activity that suggest the largest part of the economy is growing at a modest pace. Reports last week showing a weakening labor market and a slump in manufacturing spurred recession concerns and battered global financial markets.
“Ultimately, the rebound in the ISM services index in July is hardly consistent with the economy or labor market falling over a cliff, as many seem to fear” after the jobs report, Stephen Brown, deputy chief North America economist at Capital Economics, said in a note. Still, the headline figure remains weak, he added.
After briefly rising to a session high following the figures, the S&P 500 traded lower, while Treasury yields rose.
The ISM’s services employment gauge expanded for the first time since the start of the year and at the fastest pace since September. The survey results follow government data on Friday that showed the jobless rate climbed to an almost three-year high 4.3%, while payrolls growth slowed markedly.
The jobs report raised odds the Federal Reserve will resort to more aggressive interest-rate cuts through the end of the year.
Also last week, ISM data showed the biggest contraction in manufacturing in eight months. The group’s production index dropped to a more than four-year low and factory employment shrank the most since the aftermath of the pandemic.
“Overall, we’re seeing continued growth but at a more moderated pace,” Steve Miller, chair of the ISM Services Business Survey Committee, said on a call with reporters. Miller said weakness in manufacturing may be bleeding into services and that purchasing managers at service providers think the Fed needs to be cutting interest rates aggressively.
Business Activity
The ISM’s service business activity index — which parallels the group’s factory output gauge — rose nearly 5 points last month after registering the steepest one-month slide since April 2020. A measure of orders placed with service providers also moved back into expansion territory.
Ten industries reported growth in July, led by entertainment and recreation, accommodation and food services, mining and construction. Eight industries reported a decrease in activity.
At the same time, a gauge of prices paid by service providers increased 0.7 point to 57 in July, in line with the average over the past year.
Select ISM Industry Comments
“As was the case in June, restaurant sales and traffic remain flat compared to last year. A heat wave in California, rising gas prices and general angst about menu prices have tempered consumer demand.” — Accommodation & Food Services
“Business is strong in our industry, water treatment. Prices have been fairly flat, but there’s some pressure from increasing costs.” — Construction
“While interest rates on home loans continue to change dramatically at times, the number of members requesting loans has remained relatively steady.” — Finance & Insurance
“Inflation markups have been issued from suppliers.” — Health Care & Social Assistance
“Business conditions seem to be stable at this time.” — Educational Services
“Due to the election year, new projects are not moving forward as expected. Many of our customers are waiting for the election results to develop new projects.” — Information
“High interest rates continue to affect long-term buying decisions.” — Professional, Scientific & Technical Services
“Cost of construction services continues to be above predicted budget.” — Public Administration
“High food costs are having an impact on customer demand and resulting in flat business overall. Business activity stable. Supplier costs also flat in general.” — Wholesale Trade
Order backlogs at services expanded slightly last month after plunging in June, while export orders grew at a faster pace. Some 18% of respondents reported higher backlogs, the largest share since the start of 2023.
--With assistance from Chris Middleton.
(Adds comments from economist and select ISM respondents)
©2024 Bloomberg L.P.
