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The Purchasing Managers Index (PMI) survey for non-manufacturing (AKA services) from the Institute for Supply Management showed a surprise pickup in July. The services index rebounded to 56.7 in July from 55.3 in June, the ISM reported on Wednesday, August 3. This put an end to a string of three straight monthly drops in the index. (In this index any reading above 50 indicates expansion. Below 50 indicates contraction.) Economists polled by Reuters had forecast a decrease in the non-manufacturing PMI to 53.5.

This positive surprise comes after the Monday report from the ISM that the manufacturing sector showed a drop in July.

So what does the services sector surprise mean for the economy as a whole? One reason to think that we were headed into a recession sooner rather than later was a slowdown in the service sector instead of the projected pick-up in the sector. That pickup in services was supposed to pick up the slack from a slowing manufacturing sector.

If growth in the service sector can hold this strength, it keeps alive the possibility of the much-desired soft landing with higher interest rates from the Federal Reserve vanquishing inflation without tipping the economy into recession.

“The ISM activity is consistent with GDP growth of close to 2% annualized, rather than the outright declines seen over the first half of the year,” Michael Pearce, senior U.S. economist at Capital Economics in New York told Reuters. “With borrowing costs down from their June peak, and falling gasoline prices likely to feed through to rising real disposable incomes, the immediate outlook for services is looking a little brighter.”

However, I would note that the PMI surveys are essentially measures of sentiment. The survey asks purchasing managers if they see conditions improving or worsening at their companies. One factor that probably supported a more optimistic read on the economy was the ISM’s measure of new orders received by services businesses. That subindex shot up to 59.9 from 55.6 in June.

Other subindexes were less positive. The ISM’s services industry employment gauge did improve, but only to 49.1 in July from 47.4 in June. The June number was the lowest reading since July 2020.

On the inflation front, a subindex of prices paid by services industries for inputs declined to 72.3, the lowest reading since February 2021, from 80.1 in June. The 7.8 percentage-point drop was the largest since May 2017. This suggests that purchasing managers believe inflation has peaked.