Is it still a recession? The services sector contracts again, signaling strong chances of a third consecutive economic contraction
Business activity in the services sector in the United States has shrunk at the fastest rate since May 2020, a sign that the economy may already be in recession or on the brink.
S&P Global Market Intelligence said on Wednesday its services activity index recorded 47.3 in July, up slightly from the previously published “flash” estimate of 47.0 but down from 52, 7 in June.
This is the fourth straight decline for the seasonally adjusted index which had seen strong expansions earlier in the year.
“Economic conditions in the United States deteriorated markedly in July, with business activity falling in both the manufacturing and service sectors. Excluding the months of pandemic-related lockdowns, the overall drop in output was the largest since the global financial crisis and signals a strong likelihood that the economy will contract for a third consecutive quarter,” the statement said. S&P economist Chris Williamson.
Companies that reported reduced production linked it to relatively weak demand, deteriorating financial conditions and higher prices.
New orders rebounded, rising at the start of the third quarter after a slight decline in June. S&P Global said the growth in new business was attributed to new customer acquisition. Some companies, however, continued to emphasize customer reluctance in the face of declining purchasing power.
Domestic demand was behind the increase in new orders. Export orders fell for the second month, an indication of weak economies in our trading partners and the strength of the US dollar, which makes US services more expensive. Foreign tourists would spend much less than usual when visiting the United States
“The tightening of financial conditions means that the financial services sector is leading the slowdown, with another sharp hike in interest rates from the FOMC since the collection of survey data likely to intensify the slowdown. The rise in interest rates, alongside the continued spike in inflation, has meanwhile spread to the consumer sector, meaning that the surge in household spending on goods and activities such as travel, tourism, hospitality and leisure seen in the spring has now reversed as household spending is diverted to essentials,” Williamson said.
Inflationary pressures remain elevated by historical standards, but are easing from recent highs. nevertheless, the rate of inflation was faster than before May 2021. Cost burdens for service businesses increased markedly, but at the slowest pace since January.
Much of these costs are passed on to customers, driving up prices for US services at a historically rapid rate. “However, mirroring the trend in input prices, the rate of sales price inflation declined to the lowest since March 2021,” the report noted.
“The flip side of deteriorating demand is a welcome easing of price pressures, which portends a spike in inflation,” Williamson said.
The service sector continued to increase the number of workers in July, but the pace of job creation was the slowest since January. Some companies began not to fill vacancies left by workers who resigned for other positions in order to downsize.
“While employment continued to rise in July, the rate of job creation has also slowed sharply since the spring and is expected to weaken further in the coming months as businesses reduce their operating capacity due to weakening demand,” Williamson said.
Expectations for output for the year ahead weakened in July as confidence fell to its lowest since September 2020. S&P said the decline was linked to inflation and broader economic conditions cooled the ‘optimism.
A separate report from the Institute of Supply Management agreed that employment and orders rose in July. The ISM report, however, saw production rise unexpectedly. Shipments from suppliers, the fourth component of its index, also rose. As a result, the ISM Purchasing Managers’ Index rose in July, suggesting the services sector had the fastest growth in three months. Economists expected the index to fall.