U.S. services sector activity picked up in August, but there is growing concern about employment contracting for the third month in a row, and the fifth time in the past six months. Prices also remain elevated.

The ISM Services PMI rose to 52.0 in August, improving on the 50.1 recorded in July, and beating the 50.5 expected in the Econoday survey of forecasters.

August's Services PMI level showed greater strength, driven by faster expansion rates for the Business Activity and New Orders indexes. Offsetting these positive indicators, however, are continued contraction in the Employment Index, a 16-year low for the Backlog of Orders Index, and the Prices Index remaining near 70 percent, the report said.

Commentary once again was led by respondents' increasing citations of tariff impacts, with some indication that business activity and imports are being driven by an attempt to get ahead of additional price increases while preparing for the holiday peak season, it added.

The Business Activity Index showed expansion for August, and at a faster pace compared to July. New orders were also higher in August from July, while employment shrank at a slower rate compared to July.

Prices increased at a slightly slower rate compared to July and have now been in elevated territory for nine consecutive months.

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.