The ISM Non-Manufacturing Index Declined to 55.7 in July

 

Implications:  If tariff-talk is causing some companies concern, it isn't stopping broad-based growth in the service sector.  While the pace of growth slowed in July, the ISM non-manufacturing index reading of 55.7 remains comfortably in expansion territory.    Sixteen of eighteen service sector industries reported growth in July, while two showed decline.  The most forward-looking indices – new orders and business activity – showed the largest declines in July, but they are coming off elevated levels (including June's business activity reading that represented the fastest pace of growth since 2005), and provide no cause for concern.  Given the continued healthy pace of activity, expect the service sector to continue humming along in the coming months.  The supplier deliveries index also showed a decline in July, returning to more "normal" levels after a decade-high reading in May.  That said, deliveries continue to be delayed due to driver shortages in freight trucking.  These delays, paired with continued strength in new orders are putting upward pressure on prices that looks likely to remain over the intermediate term.  While this is not a sign that prices are going to take off any time soon, it does suggest inflation will continue to run above the Fed's 2% target, which has already been breached by all three key inflation measures – PPI, CPI, and the Fed's favored PCE index.  When considered alongside the stronger wording in Wednesday's FOMC Statement, two more rate hikes in 2018 look very likely, and we expect four rate hikes in 2019.  On the labor front, the employment index rose to 56.1 from 53.6 in June.  That's in-line with this morning's employment report, which we analyze in more detail here.  Taken together, today's report on the service sector shows the boost in growth thanks to tax cuts and deregulation is continuing into the second half of 2018.

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Posted on Friday, August 3, 2018 @ 1:55 PM

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.