July ISM Services PMI reading sets a new record

A strong stretch of growth in the services economy over the past several months reached an apex in July, according to data in the most recent edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—set a new record, for the second time in the last three months in July, coming in at 64.1, a 4.0% gain over June’s 60.1, and growing, at a faster rate, for the 14th consecutive month. The previous Services PMI record was May’s 64.0. July also represented the 14th consecutive month of economic growth in the services sector, with services sector growth intact in 136 of the last 138 months.

The July Services PMI reading is 4.6% above the 12-month average of 59.5, with July marking the highest reading over that timeframe and February’s 55.3 marking the lowest reading.

ISM reported that 16 of the 18 services sectors it tracks saw gains in July, including: Arts, Entertainment & Recreation; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; Retail Trade; Real Estate, Rental & Leasing; Transportation & Warehousing; Information; Other Services; Public Administration; Construction; Health Care & Social Assistance; Utilities; Professional, Scientific & Technical Services; Educational Services; Finance & Insurance; and Mining, with no industry reporting a decrease in July.

The report’s equally weighted subindexes that directly factor into the NMI saw gains in July, including:

• business activity/production increased 6.6%, to 67.0, growing, at a faster rate, for the 14th month in a row, with 17 service sectors reporting growth;  
• new orders rose 1.6%, to 63.7, growing, at a faster rate, for the 14th month in a row, with 16 service sectors reporting growth;
• employment headed up 4.5%, to 53.8, growing after a month of contraction, which was preceded by five straight months of growth, with 13 services sectors reporting growth; and
• supplier deliveries, at 72.0 (a reading of 50 or higher indicates contraction), slowing, at a faster rate, for the 26th consecutive month

Comments from ISM member respondents included in the report highlighted a confluence of issues impacting the services sector, including high levels of demand, rising costs, and supply chain challenges, among others.

“Ocean freight costs have created a negative impact to our business,” said a Wholesale Trade respondent. “The congestions at (the ports of) Long Beach/Los Angeles and Seattle have increased lead time by 15 days. Additional delays are occurring at the Chicago rail yard, (causing) two to three weeks of additional lead time.”

An Accommodation & Food Services respondent cited peak demand while still facing challenges filling open positions.

Tony Nieves, chair of the ISM’s Services Business Survey Committee, said in an interview that the report’s data surpassed initial expectations.

“We thought it would grow and continue to grow, but it exceeded that,” he said. “It is driven mostly by the four levers that make up the composite, especially with business activity up 6.6%, and the fact that employment grew [sequentially] after a month of contraction is another big driver. And that is in spite of a constrained labor pool.”

Despite this growth, Nieves acknowledged that capacity constraints and logistical challenges remain a concern, due to port congestion issues and other modal concerns. That is also compounded by materials shortages and capacity resources-related issues, too, at a time, when the services sector hit record levels in July.

Looking at employment, Nieves said that labor availability remains a challenge, with the expectation that it will improve upon the expiration of federal stimulus funding later in the year.

“I think the big challenge now is for lower-level service positions, where they are having the most [hiring] challenges right now,” he said. “Companies in food services are being hammered by it right now. When the stimulus money is gone, people are going to have to get back into the workforce. But the thing is that because there is such a competition for workers, they get to pick and choose their spots.”

As for the impact of the Delta variant on the services sector, Nieves said that while it is a concern, it is also too early to tell what its impact will be, as politicians are not inclined to implement pandemic-driven shutdowns again.  

When asked if the services economy is able to remain at its current levels or run the risk of overheating, Nieves said things likely won’t overheat, but, instead, there will be some pullback, in terms of the rate of growth.

“The sector will continue to grow, there has been a high level of pent-up demand for quite some time,” he said. “We cannot sustain this high rate of growth on a long-term basis, but certainly it will continue to grow. I don’t believe we will have anything close to any strong pullback or contraction within the next year anyway.”

Inflationary concerns: July services prices came in at 82.3, for a 2.8% increase, and growing, at a faster rate, for the 50th consecutive month, while marking the third time ever it has topped a reading of 80 (along with September 2005, at 83.5, and May 2021, at 80.6).

Nieves explained that the Federal Reserve maintains this current pricing gains are viewed as transitory, as it relates to the pairing of inflation and pent-up demand, among other factors.

“I believe that we are not going to get past this, as far as pricing goes, through at least the balance of the year,” he said. “With supply and demand where it is, we might have some easing, but I don’t see it fully happening until the supply chain is able to catch up.”