Services sector grows in August, marking second straight month, reports ISM

Services sector growth remained intact for the second consecutive month in August, according to the new edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The August Services PMI, at 51.5 (a reading of 50 or higher signals growth), was essentially flat, up 0.1% over July’s 51.4 reading, which was up 2.6% over June’s 48.8 reading. May came in at 53.8, which was preceded by a 49.4 April reading that marked the first time the Services PMI contracted since December 2022, when it came in at 49 and prior to that the last month seeing contraction was in May 2020, when it came in at 45.4.

And the August Services PMI is 0.2% below the 12-month average of 51.7, with May’s 53.8 and June’s 48.8 readings, respectively marking the high and low over that period.

ISM reported that 10 services sectors it tracks saw gains in August, including: Arts, Entertainment & Recreation; Mining; Transportation & Warehousing; Other Services; Information; Health Care & Social Assistance; Finance & Insurance; Public Administration; Educational Services; and Utilities. Sectors seeing declines included: Agriculture, Forestry, Fishing & Hunting; Retail Trade; Construction; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; and Professional, Scientific & Technical Services.

The report’s equally weighted subindexes that directly factor into the NMI mostly saw gains from July to August, including:

• Business Activity/Production, at 53.3, down 1.2% over compared to July, growing, at a slower rate, for the second consecutive month, following a 49.6 June reading, which was the first monthly contraction since May 2020, with nine sectors reporting growth;
• New Orders, at 53.0, increased 0.6%, growing, at a faster rate, for the second consecutive month, following contraction in June for the second time going back to May 2020, with eight sectors reporting growth;
• Employment, at 50.2, down 0.9%, growing, at a slower rate, for the second consecutive month and the third time in 2024, with seven sectors reporting growth;
• Backlog of Orders, at 43.7, contracting after being up in July, which was preceded by two months of contraction and contracting for the third time in 2024, turning in its lowest reading since August 2023’s 41.8, with six sectors reporting growth;
• Supplier Deliveries, at 49.6 (a reading above 50 indicates slower deliveries), were up 2.0% compared to July, growing faster, at a slower rate, for the second consecutive month, with four sectors reporting slower deliveries;
• Prices, at 57.3, increased 0.3%, increasing, at a faster rate for the 87th consecutive month, with 13 sectors reporting gains; and
• Inventories, at 52.9, increased 3.1%, growing after contracting the previous two months, with eight sectors reporting growth

Comments from ISM member panelists included in the report highlighted various issues being seen in the services sector.

A Transportation & Warehousing panelist cited gains in business and activity. And a Utilities respondent observed that steady interest rates are impacting investment in nonregulated business silos.

In an interview, Steve Miller, Chair of the ISM’s Services Business Survey Committee, said August represented what he called a slow growth month, explaining that the growth numbers for Business Activity and New Orders, while positive, remain below readings seen in recent years on a comparison basis.

“On the consumer-oriented side, some of the most consumer-sensitive [services] industries were down, with Wholesale Trade and Retail Trade having seen four months of contraction, respectively. Accommodation & Food Services and Construction went from expansion to contraction, with the outlier being Arts, Entertainment & Recreation going from contraction to expansion.”

Conversely, Miller noted that the positive growth in August came from the institutional sectors like Healthcare & Social Assistance, Finance & Insurance, Information, Transportation & Warehousing, Public Administration, and Utilities.

In the coming months, Miller said it is reasonable to expect the Services PMU to be in the 50-to-52.5 range.

“There is not anything we are seeing in the numbers that is indicating a big shocker is heading our way,” he said. “The only caveat to that would be if anything were to impact new orders, given that the backlog of orders contracted for the second time in three months. Looking at the last six months, they have been flat-to-contracting, and new orders have been strong in all of those months other than June. If we were to see something impact the New Orders index for the rest of the year, I think that, coupled with the drop over the last six months overall in backlog, could be a real problem.”

When asked how a rate cut could impact the services sector, Miller said that it would not likely have a substantial impact by year-end, while adding it could impact construction, as it is a heavy-working capital industry, as well as utilities, too. But with some recent declines in AI-related stocks, he said it remains to be seen how that could impact demand on the utilities side, as its driving significant investment in utilities to power processors, with the situation being the same in the EV market.

“The counteracting factor of lower interest rates is what is the two-top-three-year outlook un terms of utility demand,” he said. “Retail is all set; nobody is buying more product for the holidays. It is all here already.”