U.S. Service Sector Activity Unexpectedly Rises in July

By Scott Kanowsky

Investing.com -- Non-manufacturing activity in the U.S. jumped in July, according to data from the Institute for Supply Management on Wednesday, flying in the face of fears that an inflation-driven slump in the broader economy will lead to a slowdown in America's crucial services sector.

The ISM non-manufacturing purchasing managers' index rose to 56.7 during the month, growing from 55.3 in June and far above estimates of 53.5. The reading has been above the 50 level, which suggests expansion, for 26 months.

"Growth continues — at a faster rate — for the services sector, which has expanded for all but two of the last 150 months. The slight increase in services sector growth was due to an increase in business activity and new orders," said Anthony Nieves, chair of the ISM Services Business Survey Committee, in a statement.

Nieves added that the uptick in the services industry corresponds to a 2.4% increase in real gross domestic product on an annualized basis.

New orders were higher, with the ISM's index for this metric coming in at 59.9, as firms said they saw requests for fresh business and "moderate volume increases." That is up from the June mark of 55.6 and ends two straight months of contraction.

Meanwhile, the prices paid by services organizations for materials and services also increased at a slower rate in July, suggesting the potential impact of aggressive Federal Reserve policy tightening aimed at reining in soaring inflation. ISM's prices index for services businesses came in at 72.3, down from 80.1 in the prior month. It is the first reading under 80 since last September and the steepest monthly decline since 2017.

"New orders were notably higher while the prices paid index fell markedly. In sum, it's the old-fashioned 'Goldilocks' for this data release," said Mohamed El-Erian, chief economic advisor at Allianz, in a tweet.

The dollar index was trading higher by 0.32% in the wake of the release.

The figures add to a complex picture of the current state of the American economy. Last week, second quarter gross domestic product contracted for a second straight month, meaning the U.S. fell into what is widely considered to be a "technical recession."

But Fed chair Jerome Powell said the slump should be taken with a "grain of salt," adding that he does not believe the economy has entered a recession. Markets got a boost from those comments, as traders mulled a potential end to a rate-hiking cycle that has weighed on growth.

However, Fed officials have since said that borrowing costs will continue to come up from historic lows until red-hot inflation cools back down to the central bank's 2% target.