US Service sector activity moderates slightly in August, but remains near decade high

Following a blockbuster gain in July, the Institute of Supply Management (ISM) non-manufacturing index eased off by 1.3 points to 59.0 in August (from 60.3 in July). Still, the print was ahead of the consensus forecast, which called for the index to moderate to 58.2. The retrenchment was broad-based, with seven out of the index's ten subcomponents edging lower in August. After rebounding strongly in the prior month, the employment subcomponent pulled back 3.6 points to 56.0. Business activity (-1.0 points to 63.9) and new orders (-0.4 points to 63.4) also edged lower, but both subcomponents remain well in expansionary territory. Inventories (-2.5 points) and prices (-2.9 points) also moved lower in August. 

Not adjusting for seasonality, export orders fell by 4.5 points, while imports edged up by 1.0 point. Following two large monthly gains, the backlog of orders subcomponent increased by another 2.5 points on the month. Of the 18 non-manufacturing industries surveyed, 15 reported growth, two reported no change in activity and only one (mining) reported having contracted in August.

After surging to a decade-high in July, some payback was expected to materialize in the August ISM non-manufacturing report. From this standpoint, today's modest decline in the index was neither surprising nor disappointing. The near-60 headline print re-affirms that service sector activity continues to fire on all cylinders.

With this week's releases of both manufacturing and non-manufacturing surveys, data continued to point to diverging performance in the two sectors. While both headlines moved lower in August, the gap between the two indexes continued to widen and is now the largest since January 2009. This divergence is likely to persist in the near-term, as strength in the dollar and sluggish global growth continue to weigh on performance in the manufacturing sector, while the more domestically oriented service-sector reaps the benefits of rising real incomes and robust domestic activity.

With hiring in the goods-producing sector switching into lower gear this year, the service sector, which already churns out the bulk of new jobs, will play an even bigger role in the coming months. Despite some moderation in employment subcomponent in August, the reading remains consistent with expanding activity.

"We expect Friday's payroll report to show another gain in the low 200 thousands", notes TD Economics.