July data suggested that growth in the U.S. service sector remained muted, with activity rising at the weakest pace in the current five-month sequence of
expansion. A slower increase in new business was also recorded. On a more positive note, the rate of job creation picked up slightly and business sentiment improved markedly from June’s record low. On the price front, slower increases were registered for both input costs and output prices during the month.
The seasonally adjusted Markit final U.S. Services PMI™ Business Activity Index registered 51.4 in July (earlier ‘flash’ estimate: 50.9), which was unchanged from the figure recorded in June and above the neutral 50.0 threshold for the fifth consecutive month. However, the latest reading remained indicative of only a very modest expansion of business activity that was softer than the post-crisis trend (55.4).
July data pointed to a further moderate upturn in new business received by service sector companies. Moreover, the pace of expansion continued to accelerate from March’s post-crisis low and edged up to its fastest for seven months in July. Survey respondents noted that gradually improving economic conditions and competitive pricing strategies had resulted in increased client spending at the start of the third quarter.
Volumes of work outstanding increased for the first time in 12 months during July, although the pace of backlog accumulation was only marginal. Some firms noted that stronger than expected new business growth had resulted in greater levels of unfinished work at their units. Increased new order volumes and renewed pressure on operating capacity contributed to a sustained upturn in payroll numbers in July. The rate of job creation picked up to its fastest for three months, but remained slightly less marked than the average since the current period of expansion began in March 2010.
Looking ahead, service providers signalled a rebound in business confidence in July, with the balance of firms expecting a rise in activity over the year-ahead reaching its highest since January.
Anecdotal evidence suggested that forthcoming new projects, resilient client demand and hopes of improving economic conditions had underpinned business confidence in July.
Meanwhile, input price inflation remained subdued in July, with the latest rise in average cost burdens the slowest since the start of 2016. This also contributed to a further slight slowdown in output charge inflation across the service sector in July.
The final seasonally adjusted Markit U.S. Composite PMI™ Output Index posted 51.8 in July, up slightly from the unchanged from the earlier ‘flash’ figure (51.5).
The final reading was above that seen in June (51.2) and signalled the fastest expansion of private sector output since April. However, the latest upturn in business activity was still much weaker than the average since the survey began in late-2009.
A sharper rise in manufacturing production in July (output index at 53.8, up from 50.4 in June), contrasted with a sustained marginal increase in service sector business activity.
Chris Williamson, Chief Economist at Markit:
Those looking for signs of the US economy moving up a gear in the third quarter will be disappointed by the PMI readings for July.
The surveys are indicating that the pace of economic growth has held at around 1% at the start of the third quarter, largely unchanged on the signals sent by PMIs for the first and second quarters.
Once again, there’s better news on hiring, with the overall rate of job creation edging up to the highest since January. The surveys are broadly consistent with non-farm payrolls rising by 160,000 in July.
Hiring is holding up in part because of signs that the soft patch that the economy has gone through may prove temporary. Inflows of new business across the economy rose at the fastest rate seen so far this year in July, and backlogs of work were pushed higher for the first time since last October as a result.
Business confidence about the outlook is also improving, rising in the service sector to the highest since January.
These survey results add to the sense that policy makers will be encouraged by the resilience of the labour market in particular, but will want to see signs of stronger economic growth before hiking interest rates again. Another rate hike by the end of the year therefore still looks a strong possibility, though with odds of the timing of that hike skewed heavily towards December.
The NMI® registered 55.5 percent in July, 1 percentage point lower than the June reading of 56.5 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 59.3 percent, 0.2 percentage point lower than the June reading of 59.5 percent, reflecting growth for the 84th consecutive month, at a slightly slower rate in July. The New Orders Index registered 60.3 percent, 0.4 percentage point higher than the reading of 59.9 percent in June. The Employment Index decreased 1.3 percentage points in July to 51.4 percent from the June reading of 52.7 percent. The Prices Index decreased 3.6 percentage points from the June reading of 55.5 percent to 51.9 percent, indicating prices increased in July for the fourth consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in July. The majority of the respondents’ comments reflect stability and continued growth for their respective companies and a positive outlook on the economy.
Charts from Doug Short:
Comparing the PMI with the ISM (Zerohedge):