Do you believe that business activity in the U.S. services sector contracted or expanded in August?
The Institute for Supply Management’s (ISM) said its survey of services sector business indicated the most rapid pace of growth since April. Its purchasing managers index rose to 56.9 in August, up from 56.7 in July.
The services index from S&P Global Market Intelligence, on the other hand, sank even lower than the preliminary reading, which was already indicating a contraction. It fell to 43.7.
The two barometers began parting ways this spring, when the S&P Global gauge began to decline. The Institute for Supply Management’s index also declined in the spring but steadied itself this summer and has stayed in positive territory. At 13.2 points, the divergence is the widest since April of 2020.
It seems likely that the S&P Global measure is more accurately reflecting the economy. Historically, gaps between ISM and S&P Global tend to be resolved by ISM moving toward the S&P results. What’s more, beneath the surface, some of the details of the ISM survey seem unlikely. For example, ISM says the construction business expanded in July and August, which seems unlikely given the slowdown in construction spending and housing starts.
What’s more, the J.P. Morgan Global Composite PMI indicated on Tuesday that business activity decreased not just in the U.S. but also in Japan, Germany, the U.K., and Italy. The J.P.Morgan Global Services Business Activity Index posted 49.2 in August, to signal a contraction for the first time since June 2020. Growth of new business slowed to a near-standstill in August, according the J.P. Morgan index, which is compiled by the bank, ISM, and S&P Global.
“The composite PMI fell 1.5pts in August to its lowest level since June 2020. The headline index, at 49.3, is now at a level rarely seen outside of global recession. Another decline in the new orders PMI is particularly concerning and suggests that multi-decade high inflation is weighing considerably on global demand.,” said Bennett Parrish, global economist at J.P. Morgan.
On the other hand, hiring was strong in August, and gas prices continued their steep descent. So, a recovery in August cannot totally be ruled out. According to Bloomberg, the ISM covers a broader universe of services, including retail trade. So perhaps there was a bit of a back-to-school recovery in the works.
We might get a hint of that in tomorrow’s July trade balance figures. The trade deficit is expected to narrow to around $70 billion on weaker demand from U.S. consumers. If imports hold up better than expected, that will be a sign of consumer resiliency.
The Fed will also release its Beige Book on Wednesday. This is a collection of anecdotal information about the economy collected by the twelve regional Fed banks and published a couple of weeks before each meeting of the Federal Open Market Committee. The July version showed consumer spending falling as high food and gasoline prices muscled out other purchases. So, will the decline in gas prices lead to an uptick in consumer spending? That would explain the strength in the ISM figure.
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