Breakout for U.S. services economy?

August 6, 2015

It’s not very often you come across a chart like this. Usually this kind of thing happens once every 10 years or so.

ISM services July


If this surge in this reliable gauge of services business in the world’s largest economy is for real and sustained, it may just be the sign of rapid acceleration that everyone has been waiting for in what so far has been a fitful recovery.

Not only did the business activity index as shown in the chart above break nearly 3 points above even the most optimistic forecast in a Reuters poll of 73 economists, but it was one of the widest such surprises in an economic upswing in at least 15 years of polling.

Manufacturing, which is growing more slowly, traditionally leads services. But because the U.S. dollar has surged by 25 percent on a trade-weighted basis over the past year or so, that is already really hurting exporters of manufactured goods. The latest official trade data, also published on Wednesday, showed more evidence of that.

But services data reflect huge swathes of the economy that are less sensitive to international competitive pressures as they capture small American businesses serving people within the U.S. (Other surveys of small business activity are also showing very positive signs for the economy after another tough start to the year.)

So not only do services have a much greater overall share of economic output and overlap most with the rapidly-growing digital economy everywhere, but they are perhaps now more than ever a better suggestion of what strength in the U.S. economy is generated by demand from within its own borders.

That kind of growth, in turn, should give a better idea of what kind of inflation pressure can be generated on its own, no matter what disinflationary forces emanate from China and elsewhere in the global economy or how strong the U.S. dollar may be.

Many of the sub-components of this survey suggest a step-change, including momentum in employment growth, new orders, and even new export orders.

ISM July non-manufacturing


The only really subdued rise was in prices charged, reflecting the lack of pricing power in the economy. If that does not change in the near future, then interest rate rises from the Federal Reserve will be few and very far between. But that does look to be the one outlier in what is otherwise a surprisingly solid report.

— Additional reporting by Deepti Govind


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