The ISM Services PMI index pulled back to 52.7 in July from 53.9 in June. This falls short of the 53.1 percent reading consensus was expecting. This is the seventh consecutive month of expansion for the services sector.
Unlike the headline measure, the business activity sub-index cooled to 57.1, down from 59.2 in June.
The new orders index fell 0.5 percentage points (pp) to 55.0, roughly in line with June’s reading but still noticeably lower since February’s high.
The prices paid component rose to 56.8 in July. Despite the uptick in price growth the index is still lower than at any point between June 2020 and April 2023.
Supplier delivery times registered 48.1, up from 47.6 in June, while the backlog of orders index jumped 8.2 points to 52.1. Order backlogs registered their first expansion since February 2023.
The employment sub-component slipped 2.4 pp to 50.7.
Fourteen out of 18 industries expanded in July, down from fifteen in June.
Key Implications
The services sector continues to do the bulk of the heavy lifting in helping the economy defy the 525 basis points of rate hikes the Fed has thrown at it since last year. Despite the pace of new business growth slowing, consumer demand for services remains robust – helping order backlogs grow for the first time in months.
For the Fed, eyes are on inflation signals and signs from the labor market. Employment growth remains relatively tepid and while cost pressures rose slightly for the month, they are far below what the economy has had to deal with in the past two years. Policymakers will be keenly attentive to any signs that inflation is again gaining steam, but for now it remains likely that the Fed has done enough to help bring inflation back to target.
