PMI services stabilize in July, ISM services rises to a better-than-hoped 58.1 in July

July PMI data signalled a stabilization in business activity across the U.S. service sector as businesses continued to reopen following coronavirus disease 2019 (COVID-19) lockdowns in prior months. New orders declined at a slightly quicker rate, however, as domestic and foreign client demand remained muted, which was often attributed to ongoing virus-related restrictions. Nonetheless, operational restrictions led to constraints on capacity, with firms increasing their workforce numbers to process unfinished business. At the same time, output expectations improved to the strongest since March 2019 amid hopes of an end to lockdown measures over the longer term. 

On the price front, input costs and output charges rose at sharper rates as there were some reports of PPE-related costs rising, and supplier price hikes were partially passed on to customers.  

The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 50.0 at the start of the third quarter, up from 47.9 in June and improving on the 'flash' estimate of 49.6, to signal a stabilization in service sector business activity.  The latest data brought to an end a five-month sequence of contraction, with the Business Activity index rising for a third successive month from April's record low (26.7). Although some firms remained closed or noted weak client demand and disrupted working practices due to the pandemic, others stated that the resumption of business had boosted output.

In contrast, new business continued to decrease in July. Service providers registered a marginal rate of decline which was slightly greater than seen in June. The drop in new order inflows was often linked to customer hesitancy and social distancing measures stemming from the COVID-19 pandemic. 

At the same time, foreign client demand softened following a fractional expansion in June. New export orders were broadly unchanged as firms continued to note difficulties attracting sales due to the pandemic.Input costs at service providers rose for the second month running in July, with the rate of inflation accelerating to the sharpest since October 2018. The increase in cost burdens was commonly associated with supplier price hikes, with some highlighting greater costs for sanitising and PPE products especially. 

In response, services firms raised their selling prices at the start of the third quarter, despite challenging demand conditions. The increase in output charges was the quickest since October 2018. Firms stated that higher output prices were linked to the partial pass-through of greater cost burdens. 

Service providers recorded the first increase in employment since February in July, as pressure on capacity due to COVID-19 restrictions on business processes causing delays to the handling of order books. Although only marginal, the expansion in payroll numbers signalled a turnaround from the marked contractions seen in April and May. Backlogs of work rose marginally, but at the fastest pace for a year.

 Finally, business confidence improved in July to the strongest since March 2019. Expectations were buoyed by hopes of a relaxation in lockdown measures and a return to pre-pandemic business practices over the next 12 months. That said, the degree of confidence was below the series average, as some remained concerned about the longevity of the pandemic.

 ...meanwhile...

  Restaurants, dentists and other service-style companies that dominate the U.S. economy saw a surge in growth in June as businesses were allowed to reopen, pointing to a gradual recovery after extended coronavirus lockdowns.

The Institute for Supply Management’s index of nonmanufacturing companies jumped to 57.1% in June from 45.4% in May, marking the single biggest increase since the survey was created in 1997. It was also the highest reading since February and easily topped the 51% forecast of economists polled by MarketWatch.

Any number above 50% indicates more companies are expanding, but the big increase in June overstates the improvement in the economy. Growth looked so strong because it occurred after a few months of extremely low activity. Business is no where close to precrisis levels.

What’s more, a resurgence in coronavirus cases has already delivered another blow to restaurants and other businesses that rely on crowds of customers. That could dampen business in July.

The employment gauge also rose to 43.1% from 31.8%, reflecting the return of more people to work. The government on Friday said the U.S. has regained 4.8 million jobs in June.