US Service ISM: A new record in July, despite headwinds – Wells Fargo

The ISM service sector activity index released on Wednesday showed numbers above expectations. It hit a record high in July at 64.1. While stronger hiring suggests labor constraints eased at least slightly, supply problems extend well beyond the manufacturing sector, point out analysts at Wells Fargo. 

Key Quotes: 

“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.”

“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.”

“If there were some signs of supply constraints easing a bit in today's report, it was for labor. The employment index jumped 4.5 points in July. However, in comparison to readings on activity, new orders and supplier deliveries, the employment index remains well within its historical range at 53.8. In other words, businesses still seem to be having trouble finding workers to meet the rapid rise in services activity.”

“We look for nonfarm payrolls in Friday's July jobs report to increase by 865K, which would be roughly on par with June. While there are some signs that momentum stalled in July such as a flattening trend in initial jobless claims, government hiring is likely to be lifted by favorable seasonal factors amid fewer layoffs this year.”