Dramatic Divergence Seen In Dueling US Services Sector Surveys

The US economy isn’t in a recession.

Or at least not according to a spate of top-tier data which, together, suggests growth concerns which crescendoed in July when the economy entered a technical downturn following a second consecutive negative GDP print, were premature, if not entirely overblown.

On the heels of a better-than-expected read on ISM manufacturing and another solid jobs report, ISM services printed 56.9 for August, considerably better than forecast (figure below). Consensus expected 55.3. The range of estimates, from more than four-dozen economists, was 50 to 57.2.

Meanwhile, S&P Global’s gauge of US services sector activity was revised lower from an already dour flash print. At 43.7, it sits at the lowest since May of 2020. The disparity with ISM is glaring.

“The services sector had a slight uptick in growth for the month of August due to increases in business activity, new orders and employment,” ISM’s Anthony Nieves said Tuesday.

“Based on comments from respondents, there are some supply chain, logistics and cost improvements [but] material shortages remain a challenge,” he added, noting that employment “improved slightly despite a restricted labor market.” The employment index moved back into expansion territory after dipping below the 50 demarcation line in July.

Prices paid dropped to 71.5, still elevated, but the lowest since January of 2021 (figure below).

The prices index in the manufacturing survey plummeted over the past two months.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, was characteristically forthright in describing what, at least on their gauge, is a rapidly deteriorating situation. “August saw the US economy slide into a steepening downturn, underscoring the rising risk of recession as households and businesses grapple with the rising cost of living and tightening financial conditions,” he said.

Orders, Williamson cautioned, “are being lost across the board as a result of rising prices and the cost-of-living squeeze,” while employment is suffering as firms “grow increasingly reluctant to expand in the face of falling demand and an uncertain outlook.”

August’s nonfarm payrolls report showed hiring in leisure and hospitality decelerated to the slowest pace since the sector shed nearly half a million jobs during 2020’s winter COVID wave.

As was the case with manufacturing surveys released last week, ISM’s report and S&P Global’s release had at least one thing in common: They both flagged marked decreases in the rate of input cost inflation. Of course, a slower pace of gains isn’t the same as a decline, and services sector inflation is likely to remain stubborn for the foreseeable future, especially considering the rising cost of labor.

Traders will focus on the ISM beat, which in turn means pricing an incrementally more hawkish Fed. Between the ISM surveys and August’s jobs report, a 75bps hike at the September FOMC meeting seems slightly more likely than a 50bps move, although the deciding factor is obviously next week’s CPI report.

ISM anecdotes were replete with references to lingering supply chain problems. Business activity was described as “pretty steady” by a respondent in Wholesale Trade, while another, in Accommodation & Food Services, said the industry is “starting to see some cost pressures relief.”


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