Despite Rising COVID-19 Cases, Services Economy Keeps Recovering

The Institute for Supply Management tracks activity in the manufacturing and non-manufacturing sectors, and its readout for the services sector posted its second monthly gain in a row for July. The Services PMI for July rose 1 percentage point to 58.1%, beating an expected contraction to 55.0% that had been published as the consensus from Econoday. The ISM report showed the general Business Activity Index at 67.2%.

Those who responded to the ISM survey remain concerned about the COVID-19 pandemic, but they were characterized as “mostly optimistic about business conditions and the economy” as the country continues to reopen for business.

According to the July report, the Supplier Deliveries Index fell 2.3 percentage points from June to 55.2%. A reading of above 50% indicates slower deliveries, and that was indicated as typical as the economy improves and customer demand increases.

While overall inflation remains tame, the Prices Index fell by 4.8 percentage points from June to 57.6% in July. While this is still positive, as it is above the 50%, it does indicate that prices increased in July at a slower rate than had been seen in June.

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Also shown in the ISM release for July was the New Orders Index coming in at 67.7%, up 6.1 percentage points from June. The Employment Index fell a percentage point to 42.1% in July. A large contraction of 8.7 percentage points was seen in inventories, which fell to 52.0% in July, even as the Backlog of Orders Index rose by 4.0 percentage points to 55.9%.

There was a continued weakness in the international component of services. The ISM showed a sharp 9.6 percentage point drop to 49.3% for the New Export Orders Index, versus a 6.6 percentage point drop in imports to 46.3%. Both readings represent contraction as they are under the 50% level.

Investors remain focused on earnings and hopes of a vaccine after this report was positive but still showing mixed results within the various components of the services sector. The Dow Jones industrials were last seen up 270 points at 27,099, and the tech-heavy Nasdaq was up over 25 points at 10,966. The S&P 500 is now back to within about 2% of its highs at 33,250 after nearly a 19-point gain. Treasury yields were also higher, with a three basis point pop to a 0.545% yield on the 10-year Treasury note.

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