US Services PMI at 54.1%... Strong Growth for 25 Consecutive Months

[Mexico City = Shim Young-jae, Correspondent] The US services sector has continued its expansion for 25 consecutive months. Business activity and new orders have significantly increased, demonstrating economic resilience, but the employment index has once again entered a contraction phase. The price index has also risen to 70.3%, indicating that inflationary pressures remain strong.

On the 5th (local time), ISM announced that the US services PMI for July was recorded at 54.1%, up 0.1 percentage points from June's 54.0%. However, it fell short of market expectations (54.5%) by 0.4 percentage points. The services PMI has remained above the baseline of 50%, indicating that the US services sector has continued its expansion for 25 consecutive months.

The July index was 0.7 percentage points higher than the recent 12-month average of 53.4%. ISM explained that if the services PMI exceeds 48.1% in the long term, it can be interpreted as a sign of overall economic growth in the US.

According to ISM, the July services PMI aligns with a 1.9% annual increase in the US real GDP. The overall US economy has been assessed to have maintained an expansion phase for 74 consecutive months.

Steve Miller, chair of the ISM services survey, stated, "The US services economy is generally maintaining its resilience," adding, "While business activity and new orders have strengthened, concerns about mortgage rates and inflation persist."

Business activity and new orders have shown clear improvement. The business activity index rose to 59.1%, up 3.7 percentage points from June's 55.4%. This is the second-highest level since recording 60.5% in May 2024.

The new orders index increased to 57.2%, up 2.1 percentage points from the previous month's 55.1%. New orders have shown expansion for 14 consecutive months. ISM explained that corporate budget execution, large projects, and World Cup-related demand have contributed to the increase in orders.

Among the 18 sectors in the services industry in July, 13 sectors experienced growth. Retail showed the strongest growth. Transportation and warehousing, wholesale trade, business management and support services, information services, construction, accommodation and food services, public administration, utilities, educational services, mining, professional, scientific, and technical services, and finance and insurance also expanded.

In contrast, four sectors, including agriculture, forestry, fishing, hunting, and other services, health and social welfare, and real estate and rental, contracted.

Employment Contracts Again... Price Pressures Expand

Despite the apparent expansion of the services sector, employment has turned back to a declining trend. The employment index for July fell to 47.4%, down 3.8 percentage points from June's 51.2%. It dropped below the baseline of 50% for the first time in a month.

The July employment index was also 1.3 percentage points lower than the recent 12-month average of 48.7%, marking the lowest level since March of last year. The services employment index has remained below 50% for 12 out of the last 18 months.

Some companies participating in the ISM survey cited the introduction of artificial intelligence (AI) and workforce reductions in the US as reasons for the decline in employment. One respondent noted, "There is currently a slight reduction in workforce, and some of it is related to the introduction of AI." Another respondent explained that while employment in the US is decreasing, they are increasing employment in lower-cost regions like India.

Seven sectors, including utilities, construction, retail, transportation and warehousing, wholesale trade, information, and public administration, increased employment. Eight sectors, including mining, finance and insurance, other services, health and social welfare, real estate and rental, educational services, business management and support services, and professional, scientific, and technical services, saw employment decrease.

Price pressures have actually intensified. The price index for July rose to 70.3%, up 2.6 percentage points from June's 67.7%. This marks the fourth time in the last five months that the price index has exceeded 70%.

The price index has remained above 60% for 20 consecutive months. The recent 12-month average is 68.1%, the highest since April 2023. The prices of raw materials and services purchased by service companies have risen for 110 consecutive months.

Seventeen sectors, including accommodation and food services, construction, transportation and warehousing, and retail, reported rising costs. No sector reported price declines. Items noted for price increases included petroleum-related products, plastics, fuel, technical personnel, memory products, software licenses and maintenance, steel products, and transformers.

However, copper and aluminum were included in both the price increase and decrease categories. Diesel, fuel, and gasoline prices also fluctuated depending on business and transaction conditions.

Supply Chain Bottlenecks Ease, but Some Components Remain Scarce

The supplier delivery index fell to 52.8%, down 1.6 percentage points from June's 54.4%. A supplier delivery index above 50% indicates a slowdown in supply speed. Supply delays have continued for 20 consecutive months, but the index has decreased for three consecutive months.

The July index is the lowest since December of last year, at 51.8%. This indicates that the overall degree of supply chain delays is gradually easing.

However, technical personnel, memory components, and electronic components continue to face supply difficulties. Aluminum products, steel products, switches, and wires and cables are also included in the list of scarce items.

Some retail companies reported that the lead time for network equipment needed for new stores is 4 to 6 months. Utility companies stated that demand for electrical equipment materials exceeds supply capacity, leading to competition to secure production volumes.

The inventory index rose to 51.4%, up 0.2 percentage points from June's 51.2%. Service sector inventories have increased for six consecutive months. Some companies reported that they are purchasing long-lead items in advance to secure supply stability.

The inventory sentiment index fell to 52.5%, down 0.1 percentage points from the previous month's 52.6%. It has remained above 50% for 39 consecutive months. Companies assessed that their current inventory levels are somewhat higher than necessary for operations.

The backlog index fell to 50.9%, down 4.0 percentage points from June's 54.9%. Although backlogs have increased for six consecutive months, the rate of increase has significantly slowed.

The new export orders index rose to 52.0%, up 1.6 percentage points from June's 50.4%. Overseas orders have remained above 50% for six consecutive months. Responding companies explained that demand in major export markets continues despite geopolitical and trade uncertainties.

The import index rose to 51.8%, up 2.4 percentage points from June's 49.4%. It returned to an expansion phase after a month. Some companies reported increasing overseas orders to launch new products and reduce costs.

Decrease in Mentions of Tariffs and Middle East Conflicts... Oil Price Uncertainty Persists

According to ISM, the number of companies mentioning the impact of tariffs and Middle East conflicts has decreased compared to previous surveys. However, concerns about the impact of rising crude oil prices on construction materials, transportation costs, and commodity prices persist.

A respondent in the public administration sector expressed concern about the potential impact of the Iran conflict on oil prices and its possible transfer to construction material prices. Transportation and warehousing companies stated that fuel and labor costs are the main causes of price increases.

In the construction sector, responses indicated that despite expanded discounts, sales are decreasing and cost burdens are increasing. In wholesale trade, shortages of wood supply and rising freight costs were identified as burdens. Although construction companies are strongly resisting price increases, there are also positive assessments for the outlook for the remainder of the year.

In finance and insurance, while demand for corporate loans remains solid, respondents noted that customers are maintaining a cautious attitude due to uncertainties regarding interest rates and inflation.

In retail and accommodation and food services, the World Cup was again mentioned as a factor contributing to increased business activity and new orders.

ISM assessed that while demand remains stable and business activity is strong, the US services sector continues to expand, but weaknesses in employment and high price pressures are occurring simultaneously.