US ISM non-manufacturing index rises to 60.3 in July

The Institute of Supply Management (ISM) non-manufacturing index surged 4.3 points to 60.3 in July (from 56.0 in June), handsomely topping the consensus forecast for a modest uptick to 56.2. Details of the report were equally encouraging, with all but one subcomponent gaining on the month. After sliding lower in recent months, the employment subcomponent rebounded strongly in July (+6.9 points), rising to the highest level since the onset of recovery. Business activity (+3.4 points) and new orders (+5.5 points) also recorded hefty gains.

After adjusting for seasonality, export and import subcomponents rose by 3.3 and 2.9 points, respectively. The backlog orders increased by 5.8 points on the month. Of the 18 non-manufacturing industries surveyed, 16 reported growth and only two (mining and other services) reported having contracted in July.

There is definitely no summer lull in the U.S. services sector. Today's ISM non-manufacturing report was good news all-around with broad-based gains alongside an impressive headline, which passed the 60-point threshold for the first time in 10 years. 

With this week's release of both manufacturing and non-manufacturing surveys, the data continues to point to a growing divergence between the two sectors. Faced with the surging greenback and uneven global growth, U.S. factory activity has shifted into lower gear this year. Meanwhile, these headwinds are less of an issue for non-manufacturing industries that are more domestically-oriented.  Buoyancy in the non-manufacturing index suggests that service sector activity continues to expand at a fast clip. 

Going forward, domestic demand will continue to benefit from multiple tailwinds, including rising employment and incomes, and accelerating activity in the housing market. Today's large gain in employment subcomponent suggests that the service sector, which already generates the bulk of new jobs, will continue to drive above-trend employment growth. This bodes well for Friday's payroll report, which is expected to show another +200k gain.