Despite headwinds, a record pace of service sector expansion in July

Summary

The service sector continued to expand full-throttle in July, with the services ISM hitting a new record high of 64.1. While stronger hiring suggests labor constraints eased at least slightly, supply problems extend well beyond the manufacturing sector. With supplies and labor both in short supply, input costs are rising further with the prices paid measure hitting its highest level in more than 15 years.

Services Activity On Fire in July, but Will it Last?

Amid hand-wringing about the peak of growth having passed and worries about the reopening of the service economy, the ISM Services index for July set a new record high. With the exception of inventory measures, all other components are in expansion territory and most moved higher in July.

Business activity is humming, with the subindex adding 6.6 points to 67.0, just a few notches below the 69.4 print in March when stimulus checks burned a hole in consumers' pockets and drove this component to an all-time high.

The biggest change of any component was a 15.1 point leap for new export orders. While this does not factor into the headline, it does signal a rebound for service exports which could eventually help narrow the trade deficit and add to growth.

In a sense, there are two seemingly contradictory problems occurring at the same time. The first is that demand for services has come back online faster than the ability of firms to staff-up and source needed parts and materials. The second is the slow realization that COVID has gone from something people thought was largely behind us to the problem that just won't go away. Rising case counts and the particularly virulent Delta variant are threatening to disrupt the recreation renaissance we have been counting on to drive a services spending boom this summer. Through July at least, the service sector is still cranking at full throttle.

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