ISM Non-Manufacturing PMI Drops from 50.8 in June to 50.1 in July
Price Pressures Rise... Prices Paid Index Hits Highest Level Since October 2022
Last month, the U.S. service sector essentially stagnated, falling short of market expectations. New orders remained flat, and employment contracted. The effects of aggressive tariff policies have also extended to the service industry, reigniting concerns about an economic slowdown.
On August 5 (local time), the Institute for Supply Management (ISM) announced that the Non-Manufacturing Purchasing Managers' Index (PMI) for July was recorded at 50.1. This figure is down 0.7 points from the previous month (50.8) and significantly below the market forecast of 51.5.
The PMI uses 50 as the baseline: a reading above 50 indicates economic expansion, while below 50 signals contraction. The July figure barely surpassed 50, technically maintaining expansion, but in reality, the economy is close to a standstill.
Looking at the detailed indicators, the new orders index fell from 51.3 in June to 50.3 in July. The employment index dropped from 47.2 to 46.4 over the same period, marking the lowest level since March. This aligns with the sluggish non-farm employment trend reported by the U.S. Department of Labor on August 1. In July, non-farm payrolls increased by only 73,000, significantly missing the forecast of 106,000.
Price pressures, on the other hand, have increased. The prices paid index rose from 67.5 in June to 69.9 in July, reaching the highest level since October 2022. This also far exceeded the market expectation of 66.5.
Experts analyze that as new orders in the service sector decrease and costs rise, companies are reducing employment, showing signs of stagflation (rising prices amid economic stagnation). Weakness in the service sector, which accounts for about 70% of the U.S. economy, is further heightening concerns about an economic slowdown.
With both employment and service sector indicators deteriorating in succession, the market expects the U.S. Federal Reserve (Fed) to cut the benchmark interest rate in September.
Neil Dutta, Managing Director at Renaissance Macro Research, said, "If employment is slowing, it is difficult to expect price pressures to persist," adding, "Since household demand is not strong enough to absorb rising prices, a preemptive rate cut is desirable."
According to CME FedWatch, as of today, the probability that the Fed will lower the benchmark interest rate by 0.25 percentage points from the current 4.25-4.5% at the Federal Open Market Committee (FOMC) regular meeting in September is close to 90%.
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