Dive Brief:
- The services sector expanded faster than forecast last month despite pressure on supply chains from import taxes and the conflict between the U.S. and Iran, the Institute for Supply Management said Thursday.
- The ISM’s Services PMI rose to 55.4%, a 1.3 percentage point increase from July, as 12 out of 19 services industries reported growth, Steve Miller, chair of the ISM’s services business survey committee said in a report on a monthly survey of purchasing and supply executives.
- “Tariffs and the Middle East conflict returned as the most cited issues impacting respondents' supply chains,” Miller said in a statement. “Positive summer seasonality was also a common theme.”
Dive Insight:
The increase in the ISM’s services sector PMI for July signaled solid, multi-month growth in U.S. business spending, Federal Reserve Governor Christopher Waller said Thursday in a speech moments before release of the August ISM survey results.
Strength in the services sector — the primary driver behind U.S. economic growth — bolsters forecasts that gross domestic product will expand slightly more than 2% this year, Waller said, adding that both the economy and labor market are in “good shape.”
An ISM index of prices rose in August to 72.6% from 70.3% in July, exceeding 70% for the fifth time in six months, Miller said. The 12-month average of the index rose to 68.5%, the highest level since April 2023.
“General business conditions are positive,” a supply manager in the accommodation and food services industry told ISM. “The challenges lie in managing through the dynamic nature of the [Trump] administration’s policies — tariffs and Middle East conflict — that have caused numerous input cost headwinds for suppliers and us.”
Central bank officials, including Waller and Fed Chair Kevin Warsh, have identified price pressures as their primary concern with the approach of a monetary policy meeting on Sept. 15-16.
Policymakers have failed to meet their congressional mandate to ensure price stability for more than five years and have pledged to curb inflation to the Fed’s 2% goal.
Three-month inflation excluding volatile food and energy costs was 3.05% through July compared with a three-month average of 4.76% in February, Waller said, calling the reduction “a considerable improvement.”
Rising energy prices, the prospect of more tariff increases and strong demand for technology needed to build out artificial intelligence threaten to fuel inflation, Waller said.
“But, in contrast to the period of high inflation after the pandemic, wage growth, once one accounts for productivity growth, is broadly consistent with an expectation that inflation is continuing to come down to 2%,” he said.
If government data before the policy meeting this month shows that inflation is accelerating, Waller said he would consider raising the federal funds rate from its current level between 3.5% and 3.75%.
On the other hand, “if there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level,” he said.
Following the comments by Waller, traders in interest rate futures trimmed the odds that policymakers will push up the benchmark rate at their mid-month meeting to 50.4% from 63.2% on Wednesday, according to CME Group’s FedWatch tool.
