Service activity in the US reached an all-time high in July - August 11, 2021

Service activity in the US reached an all-time high in July
The United States economy is on its way to recovery from the COVID-19 pandemic. GDP growth, historically highest number of job openings, decreasing unemployment, growth in corporate earnings all point to a revival. We have some more good news: one of the most trusted economic indicators in the United States reached an all-time high in July. We are talking about the ISM Services PMI.

PMIs (Purchasing Managers’ Indexes) are economic indicators derived from private sector business surveys. The Institute for Supply Management (ISM) is one of the PMI providers. ISM produces the manufacturing and non-manufacturing (services) PMIs for the United States. These are important indicators of how well American economy is doing.

ISM carries out its PMI surveys on a monthly basis by interviewing companies from the respective industry. The ISM Services PMI covers all non-manufacturing industries. 

The ISM Services PMI is a composite index based on the diffusion indexes for the following four equally weighted indicators:

  • business activity
  • new orders
  • employment
  • supplier deliveries

Survey respondents report the changes in the indicators (better / same / worse) in current month compared to the previous month. The indexes are calculated by adding the percentage of the respondents who report an improvement and 1/2 of the percentage of the respondents who report no change:

PMI = P1 + 0.5 x P2

where:

P1 = percentage of the respondents who reported an improvement

P2 = percentage of the respondents who reported no change

Thus, the ISM Services Index may vary between 0% and 100%. 0% indicates that all respondents report a worsening compared to the previous month while 100% means that all respondents report an improvement. 50% indicates that there are no changes. The index exceeding 50% indicates the services sector is generally expanding. A level less than 50% indicates that the services sector is generally shrinking. A higher deviation from 50% means a higher rate of change. For example, an index of 60% indicates a faster rate of expansion than an index of 55%, and an index of 40% demonstrates a faster rate of decline than an index of 45%. Thus, the index shows the direction and the extent of change. 

Moreover, a Services PMI above 49.2%, over time, indicates that the overall economy is generally expanding. Below 49.2% means a decline in the overall economy.

The chart below demonstrates the development of the ISM Services PMI over time:

According to the ISM, the Services PMI reached a record high of 64.1% in July, compared to 60.1% in June. This is the highest level since the inception of the index in 2008. This is also significantly higher than the forecast of 60.5%. Moreover, all 17 service sector industries surveyed by the ISM reported growth.

ISM Services PMI at the historically highest level is good news for the services sector and the overall economy. Current index level means that the services sector and American economy in general are growing. Furthermore, it means that the growth rate increased. And all this despite the surge in delta variant of the coronavirus. Therefore, we may be quite optimistic about what is happening in the U.S. economy. 

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.