The US services sector slowed in July, but the business sector faced higher prices for inputs as demand remained firm, pointing to a long and slow push towards low inflation.
The Institute for Supply Management (ISM) said on Thursday that the non-manufacturing PMI fell to 52.7 last month from 53.9 in June. A reading above 50 indicates growth in the service industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI to ease to 53.0.
At current levels, the non-manufacturing PMI is consistent with the economy continuing to move despite a 525 basis point increase in interest rates by the Federal Reserve starting in March 2022. Demand for services is supported by a shift in spending from goods.
The ISM reported on Tuesday that manufacturing PMI fell in July for the ninth straight month, the longest stretch since the 2007-2009 Great Recession.
A measure of new orders received by service businesses slipped to 55.0 last month from 55.5 in June. While orders remain strong, services inflation increased last month.
The service sector became the focus of the Fed's attention to lower inflation to the 2% target. Service prices tend to be more difficult to change and less responsive to rate increases. The recent decline in inflation is largely due to lower prices of goods, such as energy.
A measure of prices paid by service businesses for inputs rose to 56.8 last month from 54.1 in June.
Some economists consider the ISM measure of prices paid for services to be a good indicator of personal expenditure (PCE) inflation. The Fed tracks the PCE price index for monetary policy. The annual PCE price index that excludes food and energy rose 4.1% in June after rising 4.6% in May.
Service sector employment slowed in July. Along with the deep decline in last month's measure of manufacturing jobs, this potentially presents a downside risk to non-farm payrolls in July. But other data, including the ADP national jobs report, the Conference Board's consumer confidence survey and the Challenger layoffs report showed job growth remained strong last month.
The government is scheduled to release the long-awaited jobs report for July on Friday. Economists polled by Reuters had forecast an increase of 200,000 jobs for the month after an increase of 209,000 in June. The unemployment rate is forecast to remain unchanged at 3.6%.
