Key facts
- US services sector activity expanded in August, with the ISM Non-Manufacturing PMI rising to 55.4.
- New orders reached their highest level in 3-1/2 years, signaling strong domestic demand.
- Input prices paid by businesses increased, suggesting persistent inflationary pressures.
- Employment in the services sector remained weak, with a sub-index below 50.
- Markets are pricing in a significant chance of a Federal Reserve rate hike in September.
U.S. services sector activity accelerated in August, with the Institute for Supply Management's (ISM) nonmanufacturing Purchasing Managers' Index (PMI) rising to 55.4 from 54.1 in July, surpassing economists' expectations. This increase indicates continued growth in the services sector, which constitutes a significant portion of the U.S. economy.
The surge in activity was primarily driven by strong demand, which propelled the new orders index to 60.9, its highest level since February 2023. This robust demand, partly fueled by spending on artificial intelligence, has kept supply chains stretched, with the supplier deliveries index easing to 51.3, signaling slower deliveries.
Input prices paid by businesses for goods and services increased to 72.6 in August from 70.3 in July. This rise in prices suggests that inflation could remain elevated, potentially prompting the Federal Reserve to consider further interest rate hikes. Former Fed Chairman Kevin Warsh noted that the central bank would need to take action if confidence in inflation falling to the 2% target is not achieved.
Despite the strong demand and rising prices, employment in the services sector remained subdued. The employment sub-index was little changed at 47.8, indicating that businesses are hesitant to increase headcount due to policy uncertainty. This could pose a downside risk to the upcoming nonfarm payrolls report.
Financial markets are factoring in a substantial likelihood of a 25 basis point interest rate increase by the Federal Reserve at its upcoming policy meeting, with CME Group's FedWatch tool indicating a roughly 64% chance. The current federal funds rate target range is 3.50%-3.75%.