The US services sector rebounded largely as expected in July, backed by a return to growth in activity/production, new orders and employment, after unexpectedly slipping back into contraction in June. Yet its April-July average performance is the weakest since the onset of the pandemic amid sticky costs, high interest rates and uncertainty over the US election, according to the latest survey by the Institute for Supply Management (ISM). The ISM index rose 2.6 percentage points to 51.4 in July after falling 5.0 points to 48.8 in June, which was the lowest level since 45.4 in May 2020. The index came in just above the median economist forecast of 51.0 but below its 12-month average of 51.9.

"The increase in the composite index in July is a result of an average increase of 5 percentage points for the business activity, new orders, and employment indexes, offset by the 4.6-point drop in the supplier deliveries index," Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement."Survey respondents again reported that increased costs are impacting their businesses, with generally positive commentary on business activity being flat or expanding gradually," he said."Comments continued to express a wait-and-see attitude regarding the upcoming presidential election, with one respondent expressing concern over potential increases in tariffs. Many panelists noted a return to more stable supply chain performance, albeit with higher costs."

Miller told reporters that the industries with working capital (utilities) and those sensitive to interest rates (real estate, leasing) should benefit from an expected rate cut by the Federal Reserve. But he also warned that some firms that provide services to the US manufacturing sector could be hurt as the sector was in contraction for a fourth straight month in July on lingering sluggish demand as firms remain reluctant to invest in capacity, amid elevated borrowing costs, and resorting to layoffs to tide over what appears to be a protracted trough.

Of the four sub-indexes that directly factor into the services PMI, the business activity/production index rose 4.9 points to 54.5 in July after plunging 11.6 points (the sharpest fall since the 22.9-point drop in April 2020) to 49.9 in June, hitting the lowest since 41.2 in May 2020. It followed a 10.3-point jump to an 18-month high of 61.2 in May and a 6.5-point fall to a nearly four-year low of 50.9 in April, which was also the lowest since May 2020. The new orders index rose 5.1 points to 52.4 in July after falling 6.8 points to 47.3 in June, which was the first contraction since December 2022, when it slumped 10.2 points to 45.0. It followed a 1.9-point rise to 54.1 in May and a 2.2-point dip to a 16-month low of 52.2 in April. The employment index returned to growth after indicating contraction in the previous five months. It rose 5.0 points to 51.1 after dipping 1.0 point to 46.1 in June and rising 1.2 points to 47.1 in May.

The supplier deliveries index -- the only ISM index that is inversed -- fell 4.6 point to 47.6 in July, showing"faster" deliveries as the supply chain appears to have recovered from the long lead times during the pandemic. The index fell 0.5 point to 52.2 in June and rose 4.2 points to 52.7 in May, when it popped above 50 for the first time in four months and thus indicated that supplier delivery performance was"slower" after being"faster."

ISM services fell a steep and unexpected 5 points in June to 48.8 for the lowest score since the sub-50 showings of the Covid shutdown. New orders fell nearly 7 points to 47.3. July's consensus is a solid rebound to 51.0.

Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.