- The July ISM services index accelerated to 64.1 from 60.1 of the previous month, well above market expectations for 60.5 and beating its own previous record of 64.0 in May.
- Demand remained strong with business activity expanding by 6.6 ppts to 67.0 and new orders growing by 1.6 ppts to 63.7. The new export orders sub-index recovered all of the last month’s losses and more reaching 65.8 – a whopping 15.1 ppts increase.
- The supplier deliveries index increased by 3.7 ppts to 72 from 68.5 in June and inventories dropped by 0.7 ppts to 49.2 suggesting that supply chain disruptions remain persistent. At the same time, the backlog of orders index slowed from an all-time high, decelerating to 63.5 (a decline of 2.3 ppts).
- Employment activity recovered from contractionary territory to 53.8 (+4.5 ppts) from 49.3 in June.
- After a temporary slow-down in June, the price index jumped back up with a 2.8 ppt increase to 82.5. 17 industries reported an increase in prices.
- Seventeen out of 18 industries expanded in July.
Key Implications
- The services sector continues to grow at a strong pace with healthy gains in business activity, new orders and new export orders sub-indexes. While supply constraints and challenges in logistics remain pervasive across industries, a decline in the backlog of orders is the first sign of a narrowing gap in the supply-demand mismatches.
- The recovery in the employment sub-index is encouraging as an increase in hiring should help ease some labor supply pressures stemming from the rapid rebound in demand. Still, comments from purchasing managers indicate that constrained labor remains an issue.
- Today’s report doesn’t reflect sentiment regarding the outbreak of the more infectious Delta variant, which now accounts for 92.5% of new cases (up from 54.6% at the end of June). The number of ICU patients increased a three-fold in the month of July, forcing several states announce renewed restrictions. The good news is that some new measures aim to encourage broad vaccination rather than restrict activity. We are hopeful that this strategy will avoid a severe outbreak, while keeping the services sector recovery going strong.
