The service sector grew more slowly in July as it continued to show resilience despite recession concerns.
The Institute for Supply Management’s index for services inched down to 52.7 in July from 53.9 in June, indicating expansion for the seventh straight month.
Underneath the top-line number, the prices paid component—a key focus amid sticky inflation—grew faster in July as the subindex rose to 56.8 from 54.1.
The prices paid component—a key focus amid sticky inflation—grew faster in July as the subindex rose to 56.8 from 54.1.
But there were not a lot of reasons to be concerned as July’s data stayed within a reasonable historical range. For instance, the subindex for prices paid moved between 55 and 60 for all of 2019.
The data supports our base case that disinflation will continue, not only in the goods sector but also in the service sector. Our estimate points to underlying inflation falling to the 2.5% to 3% range by the middle of next year.
The other key component is the employment index, which plunged in July to 50.7 from 53.1, which, while still barely growing, suggested a further easing in job gains ahead of the July payroll report coming out on Friday.
Claims for jobless benefits
The slower pace of service-sector hiring coupled with the outright decline in manufacturing employment observed in the ISM’s manufacturing survey last week offset a significant improvement in layoffs reflected by initial jobless claims.
New claims for jobless benefits remained in the safe zone last week, rising by only 6,000 to 227,000, the Labor Department reported on Thursday.
Read more of RSM’s perspectives on the manufacturing sector.
After spiking to above 260,000 in the first half of June, initial claims stabilized to around 230,000 on average. That was much lower than our threshold of 250,000 that suggests recessionary territory.
The job market’s mixed signals have made it harder to pinpoint what the July payroll number will be on Friday. Given the drop in job openings in June, we expect a lot more downside surprises to our call for a net gain of 175,000 in payroll employment.