At 10:00 A.M. (EDT) this morning, we received a very encouraging report on non-manufacturing activity for the month of August. It marked the 44th consecutive month that economic activity in the services sector grew.
Specifically, the Institute for Supply Management said that non-manufacturing activity registered 58.6 last month, 2.6 percentage points higher than the seasonally adjusted July reading of 56.0; an indication that non-manufacturing expanded at a faster-than-expected pace last month. In addition, the Non-Manufacturing Business Activity Index rose to 62.2, which was 1.8 percentage points above the July tally of 60.4 tally and marked the 49th consecutive month of growth. Moreover, the New Orders Index increased by 2.8 percentage points, to 60.5.
Clearly, non-manufacturing (services) activity has picked up considerably in recent months and is yet another sign, along with the Institute for Supply Management’s companion report on manufacturing activity (issued on Tuesday), that the U.S. economy is firming, even if at a moderate pace right now. This data, which will be closely watched by the Federal Reserve, may also be another indication that the economy may be in good enough shape right now to withstand a likely winding down of the lead bank’s supportive bond-buying program, possible as early as this month. It should be noted that 16 non-manufacturing industries surveyed reported growth in August, while only two saw a contraction in their industries.
Meantime, perhaps the most encouraging sign in the latest report, particularly from the Federal Reserve’s point of view, was a notable improvement in employment activity. Specifically, the Employment Index increased by 3.8 percentage points to 57.0, indicating expansion in employment for the 13th consecutive month. This reading, coupled with this morning’s report from Automatic Data Processing (ADP) that showed private-sector payrolls increased by 176,000 in August had to be well received by the Federal Reserve, which has the dual mandate to promote full employment and keep prices stable.
All in all, the latest report on non-manufacturing activity was not a game changer, but it does reiterate what we have been saying for quite some time; specifically that the U.S. economy continues to climb at a modest to moderate pace. This, coupled with positive reports last week on consumer confidence and sentiment, are further signs that growth in the ongoing third quarter may be a bit more formidable than previous expectations. It also may present a nice backdrop for which the Federal Reserve to begin dialing back on its quantitative easing measures.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.