Orders Power U.S. Services Index to Highest Since Early 2019

(Bloomberg) -- U.S. service industries expanded in July at the fastest pace since February 2019 as the strongest reading yet on orders and a pickup in business activity more than offset a bigger contraction in employment.

The Institute for Supply Management said Wednesday that its services index climbed to 58.1 from 57.1 the previous month. Readings above 50 indicate growth, and the July figure exceeded the 55 median estimate in a Bloomberg survey of economists.

The robust gauge mirrors the group's manufacturing index and underscores a growing number of purchasing managers reporting steady improvement from pandemic lows in March. At the same time, the report showed a faster pace of contraction in services employment, indicating it will take time for the jobs market to recover as the coronavirus remains a threat.

“Respondents remain concerned about the pandemic; however, they are mostly optimistic about business conditions and the economy as businesses continue to reopen,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said in a statement. “Sentiment varies across industries, as they are impacted differently.”

The ISM surveys measure changes in activity rather than levels and can be prone to large swings during turning points in the economy. Businesses are currently facing a variety of hurdles, including elevated unemployment, tepid business investment and weak global demand.

Fifteen service industries, including health care, retail trade and transportation, reported expansion in July, while three indicated activity was shrinking.

The S&P 500 advanced amid encouraging news on the vaccine front and speculation Washington lawmakers are making progress on an aid package. The yield on the 10-year note also rose, while the dollar fell.

The purchasing managers' gauge of service-related business activity, which parallels the ISM's factory production index, rose 1.2 points in July to 67.2, the strongest reading since 2004.

More Orders

An index of new orders at service providers jumped 6.1 points to 67.7, the highest in records dating back to 1997. Order backlogs climbed to a one-year high.

The ISM's measure of services employment, however, remained weak. The gauge fell to 42.1 from 43.1 as the pandemic continues to upend the labor market across industries. The Labor Department will release the July jobs report on Friday, and the median forecast calls for payroll growth to slow.

The ISM's index of exports also fell in July, signaling contraction in demand from overseas customers.

©2020 Bloomberg L.P.