MACRO: Conflicting data from the US service sector

The ISM Services PMI unexpectedly jumped to 56.7 in July, from 55.3 in June and topping analysts’ estimates of 53.5. Faster increases were seen for production (59.9 vs 56.1) and new orders (59.9 vs 55.6) while employment fell less (49.1 vs 47.4) and price pressures eased (72.3 vs 80.1). On the other hand, inventories fell at a faster pace (45 vs 47.5). "Availability issues with overland trucking, a restricted labor pool, various material shortages and inflation continue to be impediments for the services sector”, Anthony Nieves, Chair of the Institute for Supply Management said

The ISM Services PMI  reached its highest level since April. Surprisingly, S&P Global US Services PMI was revised higher to 47.3 in July from a preliminary of 47, but down from 52.7 in June to signal the sharpest fall in output since May 2020. Source: Bloomberg via ZeroHedge

Today's ISM data show that the economy is still strong (although it is worth remembering that the services react with a delay), which allows the US central bank to continue strong interest rate increases, which is recently signaled by several Fed members - today Bullard stated that he would like to reach the 3.75-4.0% level this year!

On the other hand, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: "US economic conditions worsened markedly in July, with business activity falling across both the manufacturing and service sectors. Excluding pandemic lockdown months, the overall fall in output was the largest recorded since the global financial crisis and signals a strong likelihood that the economy will contract for a third consecutive quarter.”

Investors are therefore faced with a dilemma which of the readings better reflects the current state of the economy. It is worth remembering that in 2020 the PMI was the first to signal beginning of the recession.