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SERVICES PMIs: Conflicting surveys
S&P Global: Strongest rise in business activity in year-to-date
The S&P Global US Services PMI® Business Activity Index rose to a seven-month high of 55.7 in July, up from 52.9 in June. The latest reading signaled a marked monthly expansion of output in the service sector, extending the current sequence of growth to two-and-a-half years.
Where business activity rose, service providers often linked this to higher new orders, with anecdotal evidence also highlighting improvements in customer demand, the securing of new clients and work on new products.
New orders expanded for the fifteenth consecutive month in July. As was the case with activity, the rate of expansion in new business picked up from June. The latest rise was solid and the fastest since January. The increase in total new business was recorded in spite of a further reduction in new export orders as tariffs – and government policy-related factors – continued to negatively impact inflows of new business from abroad. New export orders have now decreased in each of the past four months, although the latest reduction was only marginal and the slowest in this sequence.
Tariffs also had a clear impact on price pressures, according to anecdotal evidence. Companies widely linked the latest increase in input costs to the effects of tariffs, while also mentioning higher salaries. Input prices rose sharply, with the pace of inflation accelerating from June and coming in above the series average.
Similarly, the pace of output price inflation quickened over the month and was steep. Panelists reported passing on tariff related rises in input costs to their customers. Here too, the increase was marked in the context of historical data. (…)
The pace of job creation remained only modest, however. Moreover, a number of firms reported that workers had been hired on either a part-time or temporary basis.
Looking to the future, companies remained optimistic that business activity will increase over the coming year. Positive sentiment reflected confidence in the securing of new orders amid planned marketing efforts and expected improvements in customer confidence. Optimism eased to a three-month low in July, however, and was weaker than the series average.
But the market is focusing on this pretty weak survey. In fact, neither the WSJ nor Bloomberg even mentioned S&P Global’s survey.
The ISM: Service-Sector Slowdown in July ISM
The ISM index fell to 50.1, a reading that is consistent with the slowest possible pace of expansion. It is the third-lowest reading since the pandemic year of 2020. While the service-sector is still expanding, that expansion looks like it is girding to a halt. (…)
The four components that feed into the headline have been sending mixed signals in recent months. In June, for example, business activity and new orders both picked up, while index readings for employment and supplier deliveries both came down. Note, however, that while employment was in outright contraction, supplier deliveries was still above 50.
Source: Institute for Supply Management and Wells Fargo Economics
(…) what’s changed here in the July data is that business activity, new orders and employment are all lower. Only supplier deliveries saw a higher reading, and that of course is an indication that wait times are lengthening once again.
Price pressures in the service sector remain acute and widespread. June was technically cooling in cost pressure as the index came down to 67.5, but that is from the lofty reading of 68.7 in May. The July reading of 69.9 is the highest since late-2022 and indicates price pressures are impacting more businesses in the service sector.
We routinely hear from businesses about the challenges of rising costs and the politically fraught task of passing on tariffs. This dynamic has scope to slow capital outlays (and/or) weigh on profits. This dynamic was captured well by a health care provider who observed “Tariffs are causing additional costs as we continue to purchase equipment and supplies. Though we need to continue with these purchases, the cost is significant enough that we are postponing other projects to accommodate these cost changes.”
Another place to cut cost is payroll and the employment component fell to 46.4, marking the fourth time in five months that this component has been in contraction territory. Yet the select industry comments continue to highlight the unique traits surrounding today’s jobs market when it comes to supply.
Specifically, the release notes continued trouble finding qualified candidates. “Lost a few service technicians; still difficult to recruit in this market” and “We have lost employees due to normal attrition and are having issues backfilling these positions with qualified candidates.”
The surveys only agree on prices (up) and, to a lesser extent, on employment (slowing).
ING:
[ISM] Employment fell to 46.4 from 47.2, which doesn’t bode well for August’s jobs report given we already knew the manufacturing employment version dropped to the weakest level since June 2020. If we weight them 90% for services and 10% for manufacturing we see that these readings are historically consistent with non-farm payrolls dropping by more than 100,000.
While the relationship with payrolls hasn’t been as strong since the pandemic, at the very least it suggests we should be braced for soft jobs growth through the second half of the year at the very least. In particular, Federal government workers who accepted the severance packages from the Department of Government Efficiency are set to drop off employment numbers in September.
Select ISM Industry Comments
“Anticipation of the final tariff impacts is resulting in delayed planning for next fiscal year purchases.” — Accommodation & Food Services
“Higher tariffs are increasing the cost of imported feed ingredients and trace minerals for livestock and poultry feeds. Business and customer concerns over additional cost risk due to additional tariffs.” — Agriculture, Forestry, Fishing & Hunting
“Trade uncertainty causing client reevaluation of feasibility for projects in certain sectors, resulting in some delays or cancellations.” — Construction
“Steady business activity.” — Finance & Insurance
“Economic uncertainty remains the dominant theme. However, the tariff talk has turned out to be much more bluster than actual policy, and businesses have seemed to tune out the noise. The outlook continues to look incrementally positive.” — Real Estate, Rental & Leasing
“Retail results are solid — a little soft before and during Fourth of July week, but then a rebound. We see no reason to believe this won’t continue for the near term.” — Retail Trade
From The Transcript:
“Consumer spending remains healthy. This is true across both affluent as well as mass market consumers.” – Mastercard ($MA ) CEO Michael Miebach
“Within the U.S., while spending growth differed among consumer spend bands, all spend bands in Q3 remained resilient and consistent with past quarters. Within spend categories in the U.S., we saw relative stability to Q2 when adjusted for leap year impacts. Both U.S. discretionary and nondiscretionary spend growth remains strong, and we see no meaningful impact from tariffs.” – Visa ($V ) President Ryan McInerney
“What we can tell you is what we’ve seen so far in the first half of the year, in the first half, we just haven’t seen diminished demand. And we haven’t seen any kind of broad scale ASP increases. And so that could change in the second half. There are a lot of things that we don’t know, but that’s what we’ve seen so far.” – Amazon ($AMZN ) CEO Andrew Jassy
“Turning to credit performance. The health of our consumer remains strong and we’re not seeing any signs of weakness…Our credit trends continue to be strong after seeing delinquencies peak early last year.” – SoFi Technologies ($SOFI ) CFO Christopher Lapointe
“The year has started great for us and normally we would now be very bullish in our outlook for the full year. We feel the volatility and uncertainty in the world does not make this prudent. We still do not know what the final tariffs in the US will be. We have already had a negative impact in the double-digit euro millions in Q2 and the latest indications of tariffs will directly increase the cost of our products for the US with up to €200 million during the rest of the year. We do also not know what the indirect impact on consumer demand will be should all these tariffs cause major inflation. I have seen that many companies have either removed their Outlook fully or reduced it dramatically.” – Adidas (ADS.DE) CEO Bjørn Gulden
“We’re mindful that consumers are just beginning to feel the impact of higher prices. We’ll see more pressure in the back half on the margin, and that’s going to largely be driven by the tariffs coming into effect…there’s a dynamic where the tariffs are coming in before our price increases on a full year basis are able to offset that.” – Deckers Outdoor ($DECK ) CFO Steven Fasching
“We continue to hold a strong order book entering 2027 without considering the new launched cars, and with all the range models currently in production substantially sold out. Indeed, the newly launched Ferrari Amalfi is at the initial stage of the order collection, and the demand for the 296 Speciale family is significantly high, nearly reaching full coverage of the life cycle.” – Ferrari N.V. ($RACE ) CEO Benedetto Vigna
“We saw an incredibly anemic housing and construction markets this year. I don’t think we’ve seen anything like this since COVID and since The Great Recession before that. So there’s — I think there’s a great deal of uncertainty around people wanting to commit to what is usually the largest purchase in their lifetime during times of market volatility and uncertainty and also with higher interest rates.” – Huntsman Corp ($HUN ) CEO Peter Huntsman
“For the June quarter, we incurred approximately $800 million of tariff-related costs. For the September quarter, assuming the current global tariff rates, policies and applications do not change for the balance of the quarter and no new tariffs are added, we estimate the impact to add about $1.1 billion to our costs.” – Apple ($AAPL ) CEO Timothy Cook
“Think the green shoots, I talked about them are what we’re seeing in booking behavior on the group side and what we’re seeing very recently on the corporate business transient side, which is saying that the wait and see, it’s thawing, the freeze of April, May and to a degree, June we’re starting to see a thaw, but it’s really early, which is why my comments, and I know this is quite a filibuster I’m going here, and so there’ll be no more questions probably.” – Hilton Worldwide ($HLT ) CEO Christopher Nassetta