Service sector continued to expand in August

REAL ECONOMY BLOG | September 06, 2022

Authored by RSM US LLP

Service sector growth inched up in August, marking the 27th month in a row of expansion despite recession fears, according to data from the Institute for Supply Management released on Tuesday.

New orders and employment, a proxy for future business activities, also grew faster in August, suggesting a rebound of the economy in the third quarter.

Together with the improvement in manufacturing sentiment released last week, the data should bolster the case for another 75-basis-point rate hike by the Federal Reserve this month.

The Institute for Supply Management’s service index increased by 0.2 percentage points to 56.9% in August, suggesting robust growth. Above 50.1 indicates overall expansion. New orders rose to 61.8% from 59.9% while employment grew modestly to 50.2% after contracting in the previous month.

Prices paid for services showed continuing moderation, although they remained elevated at 71.5%. Still, inventories stayed low in August as both the inventory and inventory sentiment subindexes indicated contraction.

Mixed signals were reported by the survey respondents on supply-chain disruptions. Some executives said that supply chain bottlenecks were easing, while some saw no changes.

While our proprietary RSM US Supply Chain Index was above neutral in July for the first time in nearly three years, different industries might have different experiences.

Notable shortages were reported in electrical components, electronics, workers and microchips.

The takeaway

We expect the service sector to expand further into early next year as demand remains solid and the chance of a recession stays low.