U.S. Services Sector Shows Surprising Strength in July, Survey Shows

The rebound of the U.S. services sector continued with a stronger than expected growth in July, a survey of businesses indicated Wednesday.

Institute for Supply Management’s index of nonmanufacturing companies climbed up to 58.1 from 57.1 a month earlier, the second consecutive month of growth. Economists had forecast a slip to 55 for the index. That is the highest reading since November 2018, indicating a much stronger than expected recovery despite the rise in coronavirus infections experienced across the U.S. in July.

The numbers for the services sector are consistent with an economy whose rate of growth picked up in July, a welcome respite from signals from the labor market of a possible stall in the post-lockdown economy.

Any score above 50 indicates expansion in the sector. Fifteen of the 18 service industries tracked by ISM expanded in July.

This was the second month in a row that the ISM’s gauge for the services sector came in above expectations. Economists have been consistently underestimating the strength of the labor market and the services and manufacturing sectors.

The manufacturing sector also experienced stronger than expected growth in July, according to ISM numbers released Monday, the third consecutive month of growth for the sector. Taken together, the ISM surveys paint a picture of a U.S. economy much more resilient to the surge in coronavirus infections than many analysts thought.

The housing sector has been a source of strength for the economy, with homebuilders reporting a big rise in confidence and home prices rising rapidly.

“Sales have remained strong in homebuilding. We are experiencing longer lead times for lumber, interior trim components, appliances and light fixtures. Lumber prices are near all-time highs as lumber mills have yet to increase capacity as demand has increased,” a construction business executive told ISM.

Retail sales also show signs of strength now that most stores have been given the greenlight to reopen.

“Retail sales have continued to increase month over month, likely due to the general reopening of the economy. Mask mandates have been put in place for almost every market we operate in, causing an increased need for supply of masks for employees and customers,” a retailer commented in the ISM survey.

The index’s gauge of services sector employment, however, declined further into the contraction territory where it has been for five consecutive months. Five of the 18 sectors in the survey showed employment growth, including arts and entertainment and health care.

The manufacturing side remains in contraction territory, although it improved in July.

The labor market has shown signs of weakness recently, with initial claims for jobless benefits rising in recent weeks. On Wednesday, payroll processor ADP’s estimate of private payroll growth came in much lower than expected. The U.S. government will release its report on the labor market on Friday.