Services Sector Index Unexpectedly Rose in July

Services Sector Report Shows U.S. Expansion Continuing
Services Sector Report Shows U.S. Expansion Continuing

Investors received another sign Wednesday that while the U.S. economic expansion has slowed, it's certainly not on life support: The Institute for Supply Management's Non-Manufacturing Index, commonly known as the services index, unexpectedly rose to 54.3 in July from 53.8 in June -- the sector's seventh straight month of growth.

Equally significant, two of the three key components of the index rose in July, and all three continued to signal an expansion.

Index readings above 50 indicate that the sector is growing and below 50, contracting. The consensus among economists surveyed by Bloomberg had been that the services index would dip to 53 in July. It was 55.4 in May.

The index's closely watched business activity component dipped to 57.4 in July from 58.1 in June, but nevertheless remained at a level indicating growth.

Services Companies Are Cautiously Optimistic

Meanwhile, the employment component -- which had attracted economists' concern because it dipped below 50 in June -- moved back above that level to 50.9 in July, a reading that indicates the service sector is adding employees. Also, the new orders component jumped to 56.7 from 54.4

Services sector respondents' comments in July varied by business line, but the overall tone was one of cautious optimism.

"Our business conditions continue to dramatically outpace last year's" (information sector). "Although unemployment remains high, consumer attitude has improved and translates into higher activity levels for us" (arts, entertainment, and recreation sector). "Capital funding remains tight" (accommodation and food services sector). "We continue to see signs of improvement and a slow jobless recovery. We are also seeing a one-time windfall of business as a result of the disaster in the Gulf" (management of companies and support services sector).

Double-Dip Recession Is More Unlikely

Services play a large role play in the U.S. economy, historically accounting for about 65% to 70% of GDP. The nonmanufacturing survey polls about 400 firms in 60 sectors.

July's unexpectedly pleasant services sector report makes the probability of a double-dip recession appear more remote. True, the housing sector, with its large inventory of unsold homes, remains in a subpar condition, and the manufacturing expansion is slowing. But those factors alone aren't enough to drive the U.S. economy into a recession if the services sector, which dominates commercial activity, continues to expand. And so far, it's doing just that.

Further, the comments in July's report reflect a better mood among businesses. When combined with the employment component's positive reading, that should translate into increased hiring by services companies, and given that more than 8 million jobs were eliminated during the recession, employment growth in any sector is a welcome sight for investors, policymakers and job-seekers alike.