Activity in the U.S. services sector, which accounts for a much larger share of the overall economy than manufacturing, continued to expand at an elevated rate last month, according to a new report from IHS Markit. Specifically, the research firm’s purchasing managers' index (PMI) ended June at 56.5. That was a slight decline from May but still the 2nd-best reading since April 2015 and a solid way to end the strongest quarter for output growth in three years. Under the hood, a sharp rise in new business was offset by rapidly rising input costs. Pricing power, though, continued to improve in June thanks to strong client demand that has also contributed to the steepest increase in the pace of hiring in the past few years. Similarly, the Institute for Supply Management’s non-manufacturing index lifted to 59.1 in June.
That was better than anticipated and the 101st consecutive month of net activity expansion. Measures of production and new business improved in June, while gauges of employment and inventories softened. Comments from surveyed managers were generally positive last month, although several respondents voiced concerns that a trade war could exacerbate the recent uptick in inflation (margin strain). IHS Markit’s chief economist Chris Williamson cautioned that “business expectations about future growth have pulled back from recent highs, and new order flows have slowed for two successive months,” but optimistically added that “all indicators remain at sufficiently high levels to suggest that any slowdown may only be modest.” Altogether, both reports are consistent with expectations for U.S. gross domestic product growth to have rebounded in Q2 after what was likely only a temporary slowdown in the first quarter.
Sources: Econoday, IHS Markit, ISM, FRBA, Wells Fargo, FRBSLPost author: Charles Couch