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Service sector growth in U.S. reaches a six-month high

REAL ECONOMY BLOG | September 06, 2023

Authored by RSM US LLP

The service sector in the United States grew faster in August on the heels of a surge in summer spending, the Institute for Supply Management reported on Wednesday.

The service composite index rose to 54.5 from 52.7, marking the highest level since February.

The increase was broad-based as the main subindexes for business activity, new orders and employment all posted gains on the month.

Prices paid for services also grew faster with the subindex rising to 58.9 from 56.8, higher than the six-month moving average. That should add more reasons to expect a rebound in the monthly service inflation, which has been coming down a lot slower than what the Federal Reserve hoped for.

Service PMI

Despite the surge in demand, inventories improved markedly as both the inventory change and sentiment subindexes grew much faster on the month.

But we do not expect service activities to continue with such strong momentum as a significant portion of the increase in August was because of a number of one-time events.

Survey respondents from industries that were less affected by those events like health care, professional services and real estate remained somewhat more cautious. Here are what some of them are saying.

From an executive in health care and social assistance

Supply chains are operating consistently, though some categories of supply remain constrained. Patient volumes and revenues were down slightly (for the month) but appear to be rebounding as back-to-school season approaches. Forecast remains cautiously optimistic.

And from an executive in health care and social assistance:

The summer slowdown is similar to those in recent years due to vacations. Third-quarter projections are close to expectation. Inflationary costs are mostly in fuel and fuel-related commodities, having an adverse effect on profits.

The takeaway

While the strong service sector data is not enough to convince the Federal Reserve that it needs to hike its policy rate at its next meeting this month, it provides added reasons to keep interest rates restrictive.

The chance for a soft landing in the economy is much more elevated than it was last summer. But the last four months of the year should remain a lot more uncertain for the sector as spending tailwinds continue to fade.

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This article was written by Tuan Nguyen and originally appeared on 2023-09-06.
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