The service economy is keeping the US from slipping into a recession

As manufacturing slows down, the services sector is propping up the US economy.
Keeping the economy humming.
Keeping the economy humming.
Photo: Caitlin Ochs (Reuters)
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As US manufacturing activity slows down, spending on services is keeping the American economy afloat, recent data suggests.

Growth in the services sector accelerated in August for the second month in a row, according to the Institute for Supply Management index released Tuesday. The indicator, which is based on a survey of purchasing and supply executives, came in at 56.9% in August, reaching its highest point in four months. (A reading above 50% denotes expansion.)

Survey responses show a booming services sector as companies benefit from a slowdown in inflation and more reliable supply chains. Executives in a variety of areas, from mining to real estate, reported business is growing. Agriculture, forestry, fishing and hunting, and arts, entertainment and recreation were the only two sectors to contract.

“Starting to see some cost pressures relief,” said one survey participant in the food services industry. “The overall supply environment is healthy.”

Other data underscore the trend. The personal consumption expenditure report, released by the Bureau of Economic Analysis a couple of weeks ago, showed that, adjusted for inflation, spending on services increased by 0.2% in July compared to June.

To be sure, there are other signs the services sector might not be as strong as the ISM data suggest. Another measure of activity in the area, also released Tuesday, showed a contraction. The S&P services PMI tumbled to 43.7 down from 47.3 in July because of a decrease in new orders. But the ISM index, which goes back further in time, is more closely watched by economists, said Ken Kim, a senior economist at KPMG.

For now, the services sector is helping the US better weather the global slowdown than other countries. As a result, the risks of the US tumbling into a recession are lower than, say, in China or Germany, which rely more heavily on manufacturing.

More demand for services means higher prices.

The positive ISM data add to a mixed economic picture that is likely to complicate deliberations for US Federal Reserve policymakers when they meet to set interest rates on Sept. 21 and 22. Though the pace of inflation has slowed down as energy prices have receded, the labor market remains strong.

And what’s good news for recession watchers is bad news for inflation hawks. As the service sector recovers from its pandemic collapse, Fed economists expect prices for everything from rent to healthcare to increase—just as inflation for goods was slowing down.