US Services Sector Picks Up as Supply and Price Pressures Ease

US Services Sector Picks Up as Supply and Price Pressures Ease
Edwin Lopez sorts the money in the cash register at Frankie's Pizza in Miami on Jan. 12, 2022. (Joe Raedle/Getty Images)
Bryan Jung
The U.S. services industry picked up in July as new manufacturing orders saw steady increases with 26 consecutive months of expansion, according to the Institute for Supply Management (ISM) survey released on Aug. 4.

The survey comes after the Commerce Department reported that the U.S. economy contracted by 1.3 percent in the first half of 2022, confirming that the country is in a recession after two consecutive quarters of negative growth.

The ISM’s composite services index increased to 56.7 percent in July, rising 1.4 points from 55.3 percent in June and ending three months of consecutive declines.

Wells Fargo economists Tim Quinlan and Shannon Seery analyzed the report in a note.

“The ISM services index not only defied the consensus expectation for a decline but rose by the most in five months in July,” the note said.

Supply bottlenecks also appeared to have eased in July, as the measure of prices paid by businesses fell to their lowest level since 2017, due in part to declining commodity prices.

The supplier delivery index, which measures the delivery times for suppliers to nonmanufacturers, fell to 57.8 percent from 61.9 percent in the previous month. Suppliers fell further behind in deliveries to services, but the delays have lessened from the previous month.

ISM’s services employment index rose in July coming in at 49.1 percent, up from 47.4 percent in June, with eight industries reporting growth in employment while seven saw a downturn.

Skilled labor continues to be is in short supply, particularly in trucking, and competition between firms for employees remains intense.

“Given the uptick in current activity and new orders, service providers are still finding it necessary to hire, even if the need for labor is not as great as it has been over the past two years,” Quinlan and Seery wrote.

“We expect demand for labor is starting to ease more meaningfully as the labor market shows signs of cooling.”

The business activity index gained 3.8 points to 59.9, up from 56.1 in June, with 13 industries reporting growth, including mining, construction, and transportation, while agriculture, forestry, fishing and hunting, retail trade, finance, and insurance reported slower activity.

Economy Still Showing Weakness

Despite gains, many respondents remain cautious, as price and labor pressures continue to persist and signs of weakening demand are starting to accumulate.

New nonmanufacturing export orders rose to 59.5 in July, up from 57.5 in June. Six industries reported growth in export orders, six showed declines, and another six reported no change from June.

Only about 21 percent of the companies surveyed said they track performance activity from outside the country.

The new orders index rose to 59.9 percent from 55.6 percent in June, an increase of 4.3 percentage points.

Backlogs of orders grew again in July for the 19th consecutive month, though the pace decelerated as the index decreased to 58.3 percent from 60.5 percent in June. Nine industries reported higher backlogs in July, while five others saw declines.

The rebound in the services sector was in contrast to the S&P Global survey reporting a decline in the services sector in July, and the ISM’s Manufacturing Index survey from August 1, which saw a moderate slowdown in activity in the same period.

Meanwhile, the nonmanufacturing prices index fell to 72.3 in July, the third consecutive decline from a record-high 84.6 percent in April, with 16 industries reporting paying higher prices for inputs in July.

Respondents highlighted ongoing input price pressures, which have eased somewhat, as well as materials and labor shortages, while noting some signs of softening demand amid concern about the economic outlook.

“Despite increased concern of a downturn, there was little sign of a slowdown in the details of the report. The increase in the services index was tied to a pickup in broad activity,” Quinlan and Seery said in the note.

“While the overall report indicates still solid activity in the sector, some selected industry comments from purchasing managers did point to a weakening economic environment and coming headwinds for sales,“ they said. ”Growing fears of recession are likely weighing on optimism to some extent.”