Services economy grows in August for third straight month, reports ISM

Services sector growth held steady for the third straight month in August, expanding for the 13^th time in 14 months, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).

The August Services PMI, at 52.0 (a reading of 50 or higher signals growth), rose 1.9% over July’s 50.1 reading, growing, at a faster rate, for the third consecutive month. The August reading is 0.4% below the 12-month reading of 52.4, with October’s 55.8 and May’s 49.9 marking the respective high and low readings over that period.

ISM reported that 12 of the services sectors it tracks saw growth in August, including:  Information; Wholesale Trade; Arts, Entertainment & Recreation; Mining; Transportation & Warehousing; Educational Services; Professional, Scientific & Technical Services; Retail Trade; Utilities; Health Care & Social Assistance; Public Administration; and Real Estate, Rental & Leasing. Commodities seeing contraction included: Accommodation & Food Services; Management of Companies & Support Services; Other Services; and Construction.

The report’s subindexes that factor into the NMI were mixed from July, including:

• Business Activity/Production, at 55.0, up 1.9% from July, growing, at a faster rate, for the third consecutive month (it has not contracted since May 2020), with nine sectors seeing an increase in business activity;
• New Orders, at 56.0, up 5.7%, growing, at a faster rate, for the third consecutive month (and in 30 of the last 32 months) with 13 sectors reporting growth;
• Employment, at 46.5, rose 0.1%, contracting, at a slower rate, for the third consecutive month, with two sectors reporting employment gains; and
• Supplier Deliveries, at 50.3 (a reading above 50 indicates slower deliveries), down 0.7% from July, slowing, at a slower rate, for the ninth consecutive month, with six sectors reporting slower deliveries

Other key readings in this month’s report included Backlog of Orders falling 3.9%, to 40.4, contracting, at a faster rate, for the sixth consecutive month, and Prices falling 0.7%, to 69.2, increasing, at a slower rate, for the 99^th consecutive month.

Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs again receiving a fair amount of attention.

“We are starting to see the impact of tariffs on the cost of imported goods,” said an Accommodation & Food Services panelist. “For our company, this is primarily for goods from Asia and South America. We expect to see the full effect of tariffs in our cost of goods sold by October.”

And a Transportation & Warehousing panelist noted that business overall is tightening, with most of his customers being extremely price conscious.

In an interview, Steve Miller, Chair of the ISM Services Business Survey Committee, said that, in looking at the report, there was not an overwhelming indication of business growth, but there were some seasonal factors at play, including mentions of panelists trying to get ahead of new contracts that include tariff increases.

“For me, it is nice to see the Services PMI at 52.0, even if it is slightly below the 12-month average,” said Miller. “It looks like things are in a fairly solid place, but part of that could be companies waiting for a while to see how tariffs were going to work out and now, they need to buy and get back in the game because they cannot afford to wait anymore.”

Another takeaway from the report impacting the overall health of the services sector, cited by Miller, was New Orders, explaining that August’s strong performance was not enough to drive growth for Backlog of Orders—and due to that he noted the services sector is not seeing increased hiring.

When asked if a Federal Reserve rate cut would help to spur services sector activity, Miller said it could, to a point.

“I don’t see a 0.25% cut impacting the long-term interest or long-term mortgage rates,” he said. “I don’t think it is going to be a big boost to housing, but there will be some additional positivity for consumer sentiment heading into the new year and especially the holiday season.”

To that end, he noted services Prices did see a slight August decline while remaining expansionary, with prices rising but not at the same level as they did in July.

“That's the frequency, not the magnitude,” he said. “So, it's how much we are seeing it pretty broadly across industries but not by a lot. And then we see the we see the actual impact flow through in inflation, and the core CPI was only 3.1 so I think that's good news. Even though we're seeing pricing go up across the board, we're not seeing it accelerating to a huge degree.”

As for how tariffs are impacting the services economy, Miller said that in the ISM’s Semiannual Report released in May that more than 50% of respondents indicated they would wait three-to-six months before passing through tariff costs—which is happening now.

Looking at services on a year-to-date basis, Miller said that things are better over the last 12 months than they were the 12 months prior to that, with New Orders and Business Activity/Production serving as good signs, which need to be sustained. He added that August Imports (up 8.7% to 54.6) and Inventories (up 1.4% to 53.2) were positive and serve as indications things that happen, for driving business and responding to immediate demands—viewing them as signals that are consistent and positive for at least sustained slow growth.