The U.S. ISM non-manufacturing sector has seen mild expansion for two consecutive months, while the Markit services sector has reached its highest level in nearly two and a half years

On Thursday, September 5th, the data released by ISM showed that the service sector activity in the United States has been moderately expanding for two consecutive months.

The U.S. ISM non-manufacturing index for August was 51.5, slightly higher than the expected 51.4, with a previous value of 51.4 in July. A reading of 50 marks the dividing line between expansion and contraction.

Since the second quarter of this year, the U.S. service sector PMI has experienced significant fluctuations. In both April and June, the ISM non-manufacturing PMI contracted; in May, the expansion rate reached its highest level in nine months, benefiting from a sharp increase in business activity indicators; July data also exceeded expectations and showed expansion, with the employment index returning to the expansion zone.

In August, key sub-indexes include:

• New orders grew slightly faster than in July, rising from 52.4 to 53.

• Although the employment index remains in the expansion zone at 50.2, it has largely stagnated.

• The price index for services providers in August rose slightly to 57.3, reaching a three-month high, consistent with the average level over the past year.

• Backlog of orders saw a significant decrease, plummeting by 6.9 points from 50.6 in July to 43.7 in August. This is the largest monthly decline since the suppression of business activities in April 2020 due to the pandemic. Despite the significant fluctuations in this index, two out of the past three months have seen a contraction in backlogged orders, which may prompt companies to adjust their staffing levels and working hours.

• The business activity index was 53.3, down 1.2 points from July's 54.5, indicating a slowdown in growth. The business activity sub-index corresponds to the factory output sub-index in ISM manufacturing data.

• Inventories in August increased after shrinking a month ago, as service providers continue to believe that their inventories are too high.

Following the release of the ISM non-manufacturing data, U.S. bond yields rose, while the increase in gold prices narrowed:

• The short-term rebound in the U.S. two-year Treasury yield exceeded 4 basis points, returning above 3.74%, with an overall intraday decline narrowing to 1.2 basis points. After the release of the "small non-farm" employment data, it briefly hit a daily low of 3.7106%. The 10-year U.S. Treasury yield rose by approximately 2 basis points to 3.7439%, with the current intraday decline at 1.14 basis points, having hit a daily low of 3.7194% before the release of the ISM data.
• Spot gold fell below $2510 per ounce, with an intraday increase of less than 0.6%, having earlier risen to a daily high of $2523.46.
• The U.S. dollar index rose by nearly 20 points in the short term, approaching 101.200, with the overall intraday decline narrowing to 0.15%.

Earlier on the same day, data released by Markit showed:

• The final value of the U.S. Markit Services PMI for August was 55.7, higher than the expected 55.1 and the initial value of 55.2
• The final value of the Markit Composite PMI in the United States in August was 54.6, with an expected value of 54 and an initial value of 54.1.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated:

The services PMI index has risen to its highest level in nearly two and a half years, further indicating that the U.S. economy is showing strong growth in the third quarter, adding to signs of a soft landing. The accelerated expansion in the services sector implies that the PMI survey indicates that the U.S. GDP growth rate in the third quarter could reach 2-2.5%.

At the same time, the August survey data shows that sales price inflation has further cooled, especially in the services sector, and has now fallen to levels close to pre-pandemic averages, aligning with the Federal Reserve's 2% inflation target.

Service sector growth is particularly boosted by the prospect of rate cuts, but there are still some unfavorable factors in the coming months that may dampen growth. The uncertainty surrounding the outcome of the U.S. presidential election has dampened business optimism and investment. Meanwhile, labor shortages have constrained hiring, continuing to put upward pressure on wages.

However, perhaps more concerning is that the recent decline in manufacturing activity shows signs of weakness spreading to the entire economy, especially with industrial service orders stagnating.

Therefore, it is important to monitor whether the services sector will be affected by the recent weakness in factory activity, or whether looser monetary policy will create a rising tide that lifts all boats