THE US services sector maintained a strong pace of growth in July, but strong demand is colliding with supply constraints, driving up input costs for businesses and potentially keeping inflation elevated for a while.
The survey from the Institute for Supply Management yesterday added to manufacturing data this week in suggesting that the economy started the third quarter on a solid note, despite headwinds from the US-Israeli war with Iran. Most economists viewed the data as supportive of expectations that the Federal Reserve would raise interest rates this year.
“The latest ISM Services report underscored that the US economy remained on solid footing entering the second half of the year,” said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets. “But, the combination of stirring price pressures and a still-robust demand backdrop is likely to reinforce a higher-for-longer policy stance at the Fed.”
The ISM’s non-manufacturing purchasing managers index inched up to 54.1 last month from 54.0 in June. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of US economic activity. Steve Miller, ISM Services Business Survey Committee chair, noted that “tariff impacts and the Middle East conflict continued to be mentioned by respondents, but much less frequently than in prior reports.”
Thirteen industries, including retail trade, information, construction, public administration, utilities as well as mining, finance and insurance reported growth. The healthcare and social assistance sector was one of the four industries that contracted last month.
Comments from purchasing managers highlighted growing cost pressures, with some in the transportation and warehousing sector saying that while conditions were largely unchanged from June, prices continued to rise “driven mainly by fuel and labour costs.”
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