ISM Services PMI Points to Greater Inflation Pressure
We now have ISM’s take on the Service sector in August, and while the activity level in that part of the economy improved compared to July, the findings on inflation point to those pressures increasing during the month, hitting the highest level since mid-2022.
Meanwhile, employment in the Service sector improved modestly compared to July, but with a reading of 47.8, August was another month of contraction.
When we look at the combination of ISM’s Manufacturing and Services PMI data for August below, we can surmise a few things.
Overall economic activity is growing and aggregate net order activity, when we account for the Service sector driving more than 85% of the economy, points to that continuing. The same is true for backlogs of work. That’s good for GDP forecasts, is our thinking
However, there is little question that inflation remains elevated, and despite recent comments from Federal Reserve officials, employment in the private sector is far from robust.
This gets us back to comments we made earlier this week: Barring another negative print for Friday’s August Employment Report, something that would challenge the job market being “steady,” the likely scenario is that the Federal Reserve delivers a 25 basis point rate hike on September 16.
We recognize the market is reacting on Thursday to the comment from Fed Governor Waller that he will support holding rates steady at the September policy meeting. In Waller’s view, he is seeing signs of disinflation and is inclined to wait another meeting for more data. That next meeting is October 27 to 28, but where Waller is seeing signs of meaningful deflation isn’t being captured in recent data for the PCE Price Index or from ISM.
We’ll heed Fed Chair Warsh’s advice, and we’ll follow the data and listen to what it tells us.
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