U.S. Services PMIs: Business activity rises at fastest pace since March 2022
The seasonally adjusted S&P Global US Services PMI® Business Activity Index rose to 55.7 in August from 55.0 in July, signaling a marked monthly increase in service sector output, and one that was the most pronounced since March 2022. Activity has now risen in each of the past 19 months.
The expansion in business activity was linked by respondents to higher new orders and success in securing new customers. Additional clients helped firms to increase their new business volumes for the fourth consecutive month. Here too the pace of expansion quickened, with the solid rise the most marked since June 2023.
Growth in total new business was supported to some extent by a second consecutive monthly rise in new export orders, although the rate of expansion in new business from abroad remained only marginal as international demand was generally subdued. Where new export orders did rise, panellists often noted sales to customers in other parts of North America.
Companies were able to keep on top of workloads midway through the third quarter in spite of new business imparting some pressure on capacity. Outstanding business was broadly stable, ending a two-month sequence of accumulation.
Despite the stronger improvements in both activity and new business, there was disappointing news on the jobs front as employment decreased for the first time in three months during August. The reduction in staffing levels was only modest, however. Respondents often reported that leavers had not been replaced, mostly due to cost considerations.
Indeed, companies continued to report sharp increases in input prices during the month, with the rate of inflation remaining above the series average despite easing slightly from July. Salary pressures remained a factor pushing up input costs, while higher charges from suppliers were also widely reported.
Output prices continued to be raised in order to pass on higher input costs to customers, although there were some reports of discounting to help secure sales. As a result, the pace of prices charged inflation eased for the third month running in August and was the softest since January.
Turning to the future, service providers were again optimistic that their business activity will rise over the coming 12 months, with confidence often reflecting expectations that new orders will continue to increase. Other factors supporting optimism were predicted reductions in interest rates and expectations that business conditions would improve following the presidential election. Close to 41% of respondents were optimistic about the year-ahead outlook for activity, while 8% were pessimistic.
The S&P Global US Composite PMI Output Index increased to 54.6 in August from 54.3 in July, pointing to a marked monthly rise in business activity. Output has now risen in each of the past 19 months.
The overall increase in activity masked stark sectoral differences, however. Growth was centred on the service sector, where activity increased at the fastest pace since March 2022. In contrast, manufacturing production decreased for the first time in seven months.
A similar picture was seen with regards to new orders, with growth in services outweighing a decline in manufacturing.
Both sectors saw employment fall, however, with composite staffing levels down for the first time in three months as a result.
Input costs continued to increase sharply during August, while the pace of selling price inflation eased to a seven-month low amid a weaker rise in services.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:
“An improvement in the headline services PMI to its highest for nearly two-and-a-half years provides further encouraging evidence that the US economy is enjoying robust economic growth in the third quarter, adding to signs of a ‘soft landing’.
“The faster service sector expansion means the PMI surveys are signalling GDP growth of 2-2.5% in the third quarter. At the same time, the August survey data signaled a further cooling of selling price inflation, notably in the service sector, which has now eased close to the average seen prior to the pandemic and a level consistent with the Fed’s 2% inflation target. (…)
“However, perhaps more worryingly, the recent downturn in manufacturing activity is showing some signs of spilling over to the broader economy, notably via stalled orders for industrial services.
“It will therefore be important to monitor whether the service sector succumbs to the recent weakening of factory activity or whether looser monetary policy creates a rising tide to lift all boats.”
The ISM:
“In August, the Services PMI registered 51.5 percent, 0.1 percentage point higher than July’s figure of 51.4 percent. The reading in August marked the sixth time the composite index has been in expansion territory in 2024. The Business Activity Index registered 53.3 percent in August, which is 1.2 percentage points lower than the 54.5 percent recorded in July and indicated continuing expansion after one month of contraction in June.
The New Orders Index expanded to 53 percent in August, 0.6 percentage point higher than July’s figure of 52.4 percent. The Employment Index expanded for the third time in 2024; the reading of 50.2 percent is a 0.9-percentage point decrease compared to the 51.1 percent recorded in July. (…)
“The Prices Index registered 57.3 percent in August, a 0.3-percentage point increase from July’s reading of 57 percent. (…)
WHAT RESPONDENTS ARE SAYING
- “Generally, business is good. However, there are concerns of slowing foot traffic at restaurants and other venues where our products are sold.” [Agriculture, Forestry, Fishing & Hunting]
- “Housing market continues to be dampened by higher borrowing costs. All segments of the industry are affected. Single-family homes for sale, build for rent, and multifamily units are all feeling the effects.” [Construction]
- “Activity is increasing.” [Finance & Insurance]
- “Business continues to be strong.” [Health Care & Social Assistance]
- “Overall business is improving.” [Information]
- “Hiring of employees, contractors and consultants continues to decline as companies look to control costs during a period of economic and political uncertainty. Employee layoffs continue across a broad range of companies and industries.” [Management of Companies & Support Services]
- “Business has slowed, and it is harder than ever to find talent, but less jobs available as well.” [Professional, Scientific & Technical Services]
- “Up in business and activity.” [Transportation & Warehousing]
- “Steady interest rates are impacting investment in nonregulated business silos.” [Utilities]
- “High food costs are impacting customer demand, and weak sales performance has resulted in negative growth overall. Business activity is stable, and supplier costs are generally flat.” [Wholesale Trade]
From Ed Yardeni:
- Productivity. Nonfarm business productivity was revised 0.2% higher to 2.5% q/q (saar) in Q2. Output was revised 0.2% higher while hours worked remained unchanged. Productivity was up at a robust pace of 2.7% y/y during Q2.
- Unit labor costs. Increased productivity plus a downward revision to hourly compensation (to just 3.1% y/y!) put Unit Labor Costs inflation (ULC) at just 0.3% y/y. That’s the lowest rate since 2013. We (and Fed Chair Jerome Powell) view this series as the best metric for underlying inflation pressures. It is one of the main reasons why we’ve been in the disinflation camp since mid-2022.
Tepid growth in ULC also explains rising corporate profit margins. This next chart plots economy-wide profit margins with the GDP deflator divided by ULC. Corporate America has been able to increase its prices faster than its labor costs post pandemic, resulting in sharply improved margins.
Here’s the YoY change in the GDP deflator minus that in ULC during the last 25 years. Margins are not under pressure yet. How can they be when ULC is stagnant for a year, thanks to rising productivity? This also explains the absence of pressures for layoffs.
The globe just had its hottest summer on record
Thirteen of the past 14 months have seen global average surface temperatures that exceeded 1.5°C above preindustrial levels, which is a key warming target under the Paris Agreement.
Data: ERA5. Chart: Jacque Schrag/Axios
Global warming impacts us in many ways, one of which is making salmon fishing much more difficult 
.