US Service Gauge Rises To Six-Month High, Topping All Forecasts

(Bloomberg) -- US service sector activity rose to a six-month high in August, bolstered by a pickup in new orders and hiring.

The Institute for Supply Management's services index increased almost 2 points to 54.5, data showed Wednesday. Readings above 50 indicate expansion, and the figure topped all estimates in a Bloomberg survey of economists.

The surprisingly robust figures highlight the enduring strength of consumer demand and the broader economy. The durability of household spending has supported additional hiring as well as bolstered hopes the US can avert a recession.

The S&P 500 dropped and Treasury yields rose after the report.

Thirteen services industries reported growth in August, led by real estate, rental and leasing as well as accommodation and food services.

The ISM's employment index rose last month to its highest level since November 2021, re-enforcing the broad-based hiring seen in last week's jobs report. Additional hiring also allowed firms to make progress on backlogged orders.

Meanwhile, costs for materials and wages continued to accelerate in August, with the group's prices-paid index rising to a four-month high. A sustained pickup in costs for service providers would risk keeping inflation elevated for longer.

ISM's gauge of new orders rose to a six-month high and a measure of business activity edged higher. Exports expanded at the fastest pace in nearly a year.

Select ISM Industry Comments

“Restaurant sales and traffic trends remain positive year over year and compared to pre-pandemic (levels). Hiring is stable, with quality employees available.” - Accommodation & Food Services

“Sales on a national level have been strong. Commodity material prices remain stable, and we are finding areas for cost reductions. Material availability has returned to pre-Covid-19 levels.” - Construction

“While labor costs continue to soften, costs of pharmaceuticals and supplies remain stubbornly high, negatively impacting operating margins.” - Health Care & Social Assistance

“Steady oil and gas production and sales volume. Declining commodity prices seem to have bottomed out.” - Mining

“Our general feeling is that the (Federal Reserve's) strategy for taming inflation and building a soft landing for the economy is working better than expected.” - Public Administration

“Overall conditions seem quite good, although there is definite slowdown in residential construction driven by rapidly increasing interest rates.” - Real Estate

“Business activity continues to be lower year over year, but we are meeting the year-to-date forecast.” - Retail Trade

One concerning detail in the figures was a build in both inventories and in views that those stockpiles are currently too elevated relative to business activity.

The group's inventory sentiment measure jumped to the highest since April 2020, which risks a cutback in orders placed with manufacturers or other service providers in coming months.

--With assistance from Kristy Scheuble.

(Adds select ISM industry comments)

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