ISM Services PMI at 56.7; Strong Business Activity Eases Recession Fears



  • July ISM services PMI rises to 56.7 from 55.3, beating expectations calling for a decline to 53.5
  • Strong business activity suggests the economy remains resilient and may be able to avoid a hard landing
  • All eyes will now turn to the July NFP report

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A measure of broad U.S. business services activity grew more than expected at the start of the third quarter, a sign that the outlook may not be deteriorating as rapidly as many Wall Street analysts had predicted, despite mounting headwinds, including sky-high inflation, falling real incomes, and tightening financial conditions.

According to the Institute for Supply Management (ISM), July services PMI rose to 56.7 from 55.3 in June, a robust expansion rate that suggests the economy is not about to fall off the cliff. Analysts polled by Bloomberg News had expected the headline index to decline to 53.5. For context, any figure above 50 indicates growth, while readings below that level denote a contraction in the sector

Looking under the hood, the non-manufacturing sector was bolstered by a strong gain in new orders, which jumped to 59.9 from 55.6, signaling that demand conditions may be getting better. The employment index, for its part, remained in contraction territory, but climbed to 49.1 from 47.4, a welcome improvement that suggests that the rate of employment growth is likely to stay healthy as companies expand their operating capacity to meet demand.

DailyFX Economic Calendar

Source: DailyFX

On the inflation front, prices paid by service providers sank 7.8 points to 72.3, indicating that cost burdens are increasing at a much slower pace than in previous months. If this trend is sustained, CPI readings could begin to roll over quickly this fall, paving the way for the Fed to embrace a less hawkish policy stance before the turn of the year. This scenario could be positive for risk assets

Taken together, today’s data is encouraging on all fronts. The resilience of economic activity, coupled with easing inflationary pressures, may boost optimism that the country will be able to avert a hard landing. In any case, to better gauge the strength of the economy, traders should closely follow Friday’s July NFP report. In terms of expectations, U.S. employers are seen creating 250,000 jobs after adding 372,000 payrolls in June.


—Written by Diego Colman, Market Strategist for DailyFX


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