ISM Services Smashes Expectations On Record High New Orders, But Employment And Trade Collapse

Unlike yesterday when there was a now traditional divergence between the ISM and Markit manufacturing PMIs (the first a big beat, the second a miss), moments ago the Institute of Supply Management and the PMI survey both agreed that in July the Service sector was stronger than expected to wit:

  • Markit Service PMI 50.0, exp. 49.6, last 49.6
  • ISM non-manufacturing 58.1, Exp. 55.0, last 57.1

Looking at the latter which has a far bigger impact on the market, it printed at the highest level since Feb 2019, despite analyst consensus of a modest slowdown in July:

As in recent months, the respondents were largely optimistic:

  • “Sales have remained strong in homebuilding. We are experiencing longer lead times for lumber, interior trim components, appliances and light fixtures. Lumber prices are near all-time highs as lumber mills have yet to increase capacity as demand has increased.” (Construction)
  • “We’re still not certain whether or not the students will be coming back in their full capacity due to COVID-19. This has caused an influx of ordering safety supplies to prepare for the possibility. We have certainly increased our purchasing in the past month or so by a large amount.” (Educational Services)
  • “COVID-19 posture continues, with some 95 percent of the company workforce working remotely.” (Finance & Insurance)
  • “Surgical services still only scheduling at 50 percent capacity. Raw material shortages worldwide affecting ability to get finished PPE (iso gowns, bouffant caps, shoe covers).” (Health Care & Social Assistance)
  • “Overall positive, but cautious outlook with oil prices stabilizing in the midst of the pandemic spiking again in our region. Our company has begun to put mitigation procedures in place to bring workers back to the office despite the lingering pandemic.” (Management of Companies & Support Services)
  • “Some business picking up, but mostly virtual meetings, training and consulting. Time will tell if its profitable. The economic situation is quite dire regionally, so there is no telling if this is a trend or just a short respite. Any business at this point is much appreciated.” (Professional, Scientific & Technical Services)
  • “Phased opening of businesses continues at a slow pace. Spending is down. Unemployment is up this year, though down compared to last month. Unemployment last year was 2.9 percent. Last month, it was 19.2 percent. This month, it is 16.2 percent.” (Public Administration)
  • “COVID-19 interruptions are changing the way business is done.” (Real Estate, Rental & Leasing)
  • “Retail sales have continued to increase month over month, likely due to the general reopening of the economy. Mask mandates have been put in place for almost every market we operate in, causing an increased need for supply of masks for employees and customers.” (Retail Trade)
  • “Orders and business activity are back to pre-pandemic levels. Previously stalled projects are starting back up.” (Utilities)

Just like in yesterday’s manufacturing ISM report, today’s beat in its non-mfg peer was driven almost entirely by a record surge in New Orders which have exploded from a record low 32.9 in April to a record high 67.7 in July…

… although just like yesterday, the offset to the surge in new orders was a continued weakness in Employment, which shrank from 43.1 to 42.1

And following on today’s disappointing ADP payrolls report, adding the signals from the two ISM surveys and it is very likely that Friday’s payrolls report will be a major disappointment.

Another adverse development was the sharp drop in new export orders and imports, which suggest that while businesses are optimistic on new orders, these are largely domestic as trade with major commercial partners is collapsing.

Finally, for those career economists at the Fed who see deflation everywhere, here is the ISM’s breakdown of commodities down in price: “No commodities were reported down in price.”

Because deflation.

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