The ISM Services Index improved in August, adding 0.2 percentage points (ppts) with a reading of 56.9– higher than the 54.9 expected by the consensus.
Demand factors added 0.7 ppts to the overall index. Both the business activity and the new orders subindexes rose above 60 for the first time since December and March, respectively. The biggest contributor was the new orders subindex, which rose by 1.9 ppts to 61.8, while business activity subindex added 1.0 ppts with a reading of 60.9.
Supplier deliveries subtracted 0.8 ppts from the headline, easing to 54.5 – the lowest level since the beginning of the pandemic.
Employment activity moved out of contractionary territory, gaining 1.1 ppts to reach 50.2 – another signal of easing supply.
The backlog of orders subindex (which doesn’t have a weight in the aggregate measure, but is a good gauge of supply-demand imbalances) declined 4.4 ppts to 53.9.
The prices paid component declined further, easing by 0.8 ppts to 71.5.
Fourteen industries expanded in August. The two industries reporting a decrease in the month of August are: Agriculture, Forestry, Fishing & Hunting; and Arts, Entertainment & Recreation.
Key Implications
Services continued to expand at a faster pace than the previous month and slightly above the second quarter average. Importantly, demand factors – such as business activity, new orders and new export orders – are accelerating.
Meanwhile, there is more evidence that supply challenges are normalizing. The gap between the supplier deliveries time and the rest of the index’s drivers continued to narrow with today’s reading just two percentage points above its pre-pandemic average. This seems to have contributed to a decline in the prices paid component, which should help ease the inflationary pressure and soothe consumer sentiment.
Easing supply-chain challenges and lower prices is good news for the Fed. Still, a higher than expected reading may reinforce bets for a supersized hike later this month. As this is one of the last data releases before the Fed enters a black-out period on Saturday, all eyes now turn Chair Powell and other FOMC speakers as they deliver their addresses this week.
