US services sector slows in July while prices pick up, ISM survey shows

WASHINGTON (Reuters) – The U.S. services sector slowed in July, but businesses faced higher prices for inputs as demand continued to hold up, suggesting a long and slow road to low inflation.

The Institute for Supply Management (ISM) said on Thursday its non-manufacturing PMI fell to 52.7 last month from 53.9 in June. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI would decrease to 53.0.

At current levels, the non-manufacturing PMI is consistent with an economy that continues to chug along despite 525 basis points in interest rate hikes from the Federal Reserve since March 2022. Demand for services is being underpinned by a shift in spending away from goods.

The ISM reported on Tuesday that its manufacturing PMI contracted in July for the ninth straight month, the longest such stretch since the 2007-2009 Great Recession.

A measure of new orders received by services businesses dipped to 55.0 last month from 55.5 in June. With orders still solid, services inflation picked up last month.

The services sector is at the center of the Fed’s battle to bring inflation down to its 2% target. Services prices tend to be stickier and less responsive to rate hikes. The recent slowdown in inflation has been largely driven by declining prices for goods, such as energy.

A gauge of prices paid by services businesses for inputs increased to 56.8 last month from 54.1 in June.

Some economists view the ISM services prices paid measure as a good predictor of personal consumption expenditures (PCE) inflation. The Fed tracks the PCE price indexes for monetary policy. The annual PCE price index excluding food and energy increased 4.1% in June after rising 4.6% in May.

Services sector employment slowed in July. Together with a sharp decline in the manufacturing employment gauge last month, that potentially poses a downside risk to July’s nonfarm payrolls count. But other data, including the ADP national employment report, the Conference Board’s consumer confidence survey and the Challenger layoffs report suggest job growth remained strong last month.

The government is scheduled to release its closely watched employment report for July on Friday. Economists polled by Reuters have forecast an increase of 200,000 jobs for the month after a rise of 209,000 in June. The unemployment rate is forecast to be unchanged at 3.6%.

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