Services Sector Indexes Show Slowing Growth

The PMI services index came in below expectations, at 56.0 for the final July score which is down 2 tenths from the mid-month flash and down 5 tenths from June.

Growth in incoming orders, which was described as very strong in the mid-month flash, is downgraded a bit in today's final report, finishing July at the slowest growth rate since early in the year. Underscoring the step lower for orders is the first contraction in backlogs in more than a year.

But slowing in order growth may be a positive for this sample which appears to be approaching capacity limits. Business activity is at one the strongest rates in three years yet employment growth is being limited by lack of skilled labor. Input costs are still climbing and selling prices are rising at nearly a 4-year high.

Optimism for the year ahead is at a 6-month low and is described in the report as subdued, the result of tariff concerns including their effects on customer demand. Yet the upshot of this report is positive, pointing to a solid showing for the third-quarter economy. Note that these results together with last week's manufacturing PMI, which came in at 55.3, make for a 1/2 point dip in the PMI composite to 55.7 vs 56.2 in June.

...meanwhile...

Slowing is clearly the theme of the ISM non-manufacturing report. This report usually hits expectations but July's 55.7 is more than 3 points under Econoday's consensus and more than 2 points under the low estimate.

Like the PMI services report, both new orders, down more than 5 points to 57.0, and backlog orders, down 5 points to 51.5, show softening. Export orders in this report, at 58.0, remain very strong but are down 2.5 points.

Business activity also slowed, down nearly 7.5 points to 56.5 with delivery times showing less stress. Input prices remain highly elevated at 63.4, up nearly 3 points in the month.

Slowing is not only the theme of today's service reports but was also the theme of ISM's manufacturing report on Wednesday. The economy may have taken a breather in July which, given what appear to be approaching limits on capacity, could prove a long-term plus for the economy.