US Services Surveys Indicate Economic Growth Despite Manufacturing Decline

Services Surveys Show Improvement

Following a disappointing performance in the Manufacturing surveys, the Services surveys have given some hope to those who believe in a 'soft landing' narrative. This is crucial as we approach the all-important payrolls print.

S&P Global's Services PMI rose from its initial print of 55.2 to a final August print of 55.7, up from 55.0 in July. This is the highest it has been since March 2022. Meanwhile, ISM Services increased marginally from 51.4 to 51.5, just surpassing the 51.4 expectations.

'Soft' Data Improves as 'Hard' Data Languishes

While the 'soft' data shows improvement, 'hard' data continues to struggle. The ISM survey revealed an improvement in new orders, a worsening in employment, and a rise in prices paid.

Comments from S&P Global

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the data, stating that the rise in the services PMI to its highest in nearly two-and-a-half years is an encouraging sign of robust economic growth in the US economy for the third quarter. He suggested this was indicative of a 'soft landing'.

However, he questioned the need for rate cuts given the positive economic indicators. He mentioned that the PMI surveys are signaling GDP growth of 2-2.5% in the third quarter. The August survey data also signaled a cooling of selling price inflation, particularly in the service sector, which is now close to the average seen prior to the pandemic and consistent with the Fed’s 2% inflation target.

Future Concerns

Williamson also pointed out that the growth in services has been particularly buoyed by the prospect of lower interest rates. However, he noted several headwinds that could potentially dampen growth in the coming months. These include uncertainty regarding the outcome of the Presidential Election, which is subduing business optimism and investment. Hiring is being constrained by labor shortages, which continue to put upward pressure on wages.

Furthermore, he expressed concern that the recent downturn in manufacturing activity is showing signs of impacting the broader economy, notably through stalled orders for industrial services. He stressed the importance of monitoring whether the service sector succumbs to the recent weakening of factory activity or whether looser monetary policy creates a rising tide to lift all boats.

Bottom Line

It appears that the US economy is demonstrating signs of robust growth in the service sector, despite a downturn in manufacturing activity. However, the prospect of lower interest rates and uncertainty regarding the Presidential Election could potentially impact this growth. The question remains: will the service sector weather the storm of weakening factory activity, or will a looser monetary policy be the rising tide that lifts all boats? We'd love to hear your thoughts on this matter. Please feel free to share this article with your friends and sign up for the Daily Briefing, which is available every day at 6pm.