U.S. Services Sector Activity Rebounds

WASHINGTON (Reuters) – U.S. services sector activity rebounded from a four-year low in July. This increase was driven by a bounce back in new orders and the first rise in employment in six months, potentially alleviating recession fears due to a spike in unemployment and an ongoing stock market sell-off.

The Institute for Supply Management (ISM) reported on Monday that its non-manufacturing purchasing managers’ index (PMI) rose to 51.4 last month from 48.8 in June, the lowest level since May 2020. A PMI reading above 50 signals growth in the services sector, which makes up over two-thirds of the economy. The ISM considers readings above 49 over time as generally indicative of overall economic expansion. Economists had predicted the services PMI would climb to 51.0.

This report helped lift U.S. stock market indexes from early-morning lows, although the S&P 500 Index remained over 3% lower amid a global equities rout. The S&P has fallen nearly 5% in the last two sessions, marking its most significant two-day loss in over two years.

Data released on Friday revealed that the unemployment rate rose to a nearly three-year high of 4.3% in July from 4.1% in June. The labor market is slowing as the Federal Reserve’s substantial interest rate hikes in 2022 and 2023 dampen demand.

The U.S. central bank decided last week to maintain its benchmark overnight interest rate in the 5.25%-5.50% range, where it has stayed for more than a year but hinted at the possibility of rate reductions at its next meeting in September. Financial markets also anticipate rate cuts in November and December.

The ISM survey’s new orders measure surged to 52.4 from 47.3 in June, the lowest since December 2022. The services employment measure increased to 51.1, growing for the first time since January, from 46.1 in June. This five-point rise marked the second-largest increase in over three years, following a 6.7-point spike in January.

This data supports the view that the slowdown in nonfarm payrolls in July does not signify a beginning of labor market deterioration. Nonfarm payrolls increased by 114,000 last month, the second smallest gain of the year, with service providers adding just 72,000 jobs—the fewest since December 2020.

Steve Miller, chair of ISM’s Services Business Survey Committee, noted that survey respondents generally expressed positive views on business activity, indicating it was flat or slowly expanding.

Inflation in the services sector picked up slightly in July, but likely not enough to change the narrative of decreasing price pressures. The ISM’s prices paid measure for services inputs edged up to 57.0 from 56.3 in June.