Few observers could have expected that the ISM service index would become the market’s savior this week, but that is what happened. The index rose to positive territory at 51.4 after dropping in June to 48.8, suggesting that some of the concerns over an imminent recession looked overblown.
We remain cautious about the more alarmist warnings of recession that were being made over the weekend. Economic fundamentals remain solid, at least for the time being.
More important, we always advise against the overreactions to one month of data, especially after last week’s jobs report.
According to the data from the Institute for Supply Management released on Monday, the service employment subindex picked up in July to 51.1, which might feed into August’s jobs report, potentially offsetting most of the concerns over a hard landing. Other subindexes also showed improvement as well, like business activity and new orders.
Whether the Federal Reserve cuts its policy rate by 25 or 50 basis points in September will depend a lot on the data between now and the next Federal Open Market Committee meeting in September.
Read more of RSM’s insights on the economy and the middle market.
We should have more clarity, and clarity is what the Fed and the overall market needs at the moment. The Fed’s talk about the two-sided risks is heavily weighted toward lower growth at the moment, not inflation. There is an increasing chance that we might see a 50-basis point cut if conditions deteriorate further.
The takeaway
It was supposed to be a light economic data week in the United States. But with the significant volatility kicking off the week, any data will be scrutinized for signs of weaknesses or strength. Still, as we advise, it’s important not to read too much into one month of data.
