The services economy continues to decelerate – The Daily Tearsheet

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down small.

The services economy continued to expand in July, albeit at a slower rate according to the ISM Services Index. The Business Activity Index moved markedly lower although it is still in expansion territory. On the other side, employment continued to contract, while prices rose.

“July’s PMI^® level continues to reflect slow growth, and survey respondents indicated that seasonal and weather factors had negative impacts on business. The Employment Index’s continued contraction and faster expansion of the Prices Index are worrisome developments. The New Exports (a 3.2-percentage point decrease in July) and Imports (a 5.8-point drop) indexes, which both moved from expansion to contraction, provided signals that tariff tensions are impacting global trade. However, continued expansion in the Business Activity and New Orders indexes, together with a slight improvement in the Backlog of Orders Index, highlight the resilience of the U.S. services sector. Some respondents noted increased transportation congestion that supported the ‘slower’ Supplier Deliveries Index reading, another sign that activity levels are expanding. The most common topic among survey panelists remained tariff-related impacts, with a noticeable increase in commodities listed as up in price.”

Mortgage applications increased 3.1% last week as purchases increased 2% and refis rose 5%. “Mortgage rates moved lower last week, following declining Treasury yields as economic data releases signaled a weakening U.S. economy. As a result, the 30-year fixed rate decreased for the third straight week to 6.77%,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Borrowers sought to take advantage of these lower rates, as both purchase and refinance applications increased over the week. Purchase activity continued to lead 2024’s pace, as increasing for-sale inventory of homes has been supporting homebuying, but on the other hand recent weakness in the economic environment has deterred some prospective homebuyers.”

So far, the fear-mongering about tariffs hasn’t been proven right. Inflation has ticked up mildly, but nothing dramatic, the trade deficit has shrunk, and government revenues have increased. We have seen no supply shocks like we did during the pandemic. Employment has slowed, however so the effect hasn’t been completely benign.