The Numbers: The service sector, which employs the majority of Americans, rebounded in July, challenging the increasing fears of a potential U.S. recession. The Institute for Supply Management’s service business index rose to 51.4% in July from 48.8% in June, which had been the lowest level since May 2020, during the peak of the COVID-19 pandemic. Readings above 50% are considered a positive sign for the economy. Steve Miller, chairman of the survey, noted that most companies reported their business was either "flat or expanding gradually."
Economists surveyed by The Wall Street Journal had predicted a reading of 50.9%.
In contrast, a similar ISM survey of American manufacturers showed negative results for June, marking the fourth consecutive month of decline. Manufacturers have been more impacted by high interest rates compared to service-oriented sectors like retail, banking, healthcare, and dining.
Nevertheless, the broader economic slowdown and easing inflation are widely anticipated to lead the Federal Reserve to cut interest rates by September at the latest.
Key details:
- The new-orders index surged 5.1 points to 52.4%.
- The production index climbed 4.9 points to 54.5%.
- The employment index rose 5 points to 51.1%, ending a five-month streak of negative readings and reaching its highest level since last fall.
- The prices-paid index, a gauge of inflation, inched up less than a point to 57.0%, approaching pre-pandemic levels, indicating that inflation is moderating.
Big picture: The service sector has been a powerhouse since the end of the pandemic, and while it continues to grow, it is starting to show signs of strain.
High interest rates have slowed consumer spending and business investment, with service providers also feeling the impact.
The Federal Reserve is expected to lower interest rates next month in response to a slowdown in inflation, which may offer much-needed relief to the economy.
Looking ahead, Stephen Brown, deputy chief North America economist at Capital Economics, noted, “The rebound in the ISM services index for July suggests that the economy and labor market are not on the brink of collapse, despite fears raised by the weaker July employment report.” He added, “There was no mention of the dreaded R-word [recession] in the accompanying press release, which maintained a mostly neutral tone.”
Market reaction: The Dow Jones Industrial Average and S&P 500 both fell on Monday, driven by renewed concerns about a recession and escalating tensions in the Middle East.
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