The ISM Services Index accelerated in July, adding 1.4 percentage points (ppts) with a reading of 56.7 – higher than the 53.5 expected by the consensus.
Demand factors added 2 ppts to the overall index. The biggest contributor was the new orders subindex, which rose by 4.3 ppts to 59.9, while business activity subindex added 3.8 ppts to match the new orders reading of 59.9.
Supply bottlenecks eased in July with the supplier deliveries losing 4.1 ppts to 57.8 and the backlog of orders subindex (which doesn’t have a weight in the aggregate measure but is a good gauge of supply-demand imbalances) declining by 2.2 ppts to 58.3.
Employment activity remained in contractionary territory, but gained 1.7 ppts to reach 49.7.
Inventories contracted by 2.5 ppts to 45.0 in June, while inventory sentiment moved out of contractionary territory with a reading of 50.1 – gaining 3.9 ppts.
The prices paid component declined further, dropping below 80 for the first time since September 2021 with a considerable decline of 7.8 ppts to 72.3.
Thirteen industries expanded in July. Industries reporting a contraction are Agriculture, Forestry, Fishing & Hunting; Retail Trade; and Finance & Insurance.
The services sector proved again that it won’t wear down easily when there is still plenty of pent-up demand. Whether this will prove to be a harbinger of stronger consumption relative to the disappointing June PCE report is yet to be seen, however, high frequency indicators suggest no material change in spending on services in July.
The one factor that weighed the headline index down was the supplier deliveries subindex, which indicates normalization of supply side factors. Notably, the gap between the supplier deliveries time and the rest of the index’s drivers continued to narrow – the trend we first observed at the end of last year. This seems to have contributed to a decline in the prices paid component and, should this trend persist, will help ease the inflationary pressure and soothe consumer sentiment.
The employment component was stronger than last month’s reading but remained below 50, indicative of a contraction. This sub-index has been too volatile and often negatively biased by persistent labor shortages, so it seems likely that the slight improvement in the subindex will result in healthy employment gains on Friday.