Service Sector of U.S. Economy Strengthens

August 08, 2014 | Mike Spychalski, CAIA, Vice President

This weeks’ Chart of the Week looks at the state of the service sector in the U.S., as measured by the Institute for Supply Management (ISM) Non-Manufacturing Index. On August 5th, the ISM released July data for the ISM Non-Manufacturing Index, which posted a reading of 58.7 (a reading greater than 50 indicates expansion in the service sector while a reading below 50 indicates contraction). This was the highest reading since December 2005 and is one of the highest on record for the index (which dates back to July 1997). This index is important because it serves as a gauge of the overall strength of the service sector of the U.S. economy, and considering that the service sector is the single largest component of U.S. GDP (representing 45.7% of GDP as of 2Q 2014), it has fairly significant implications for the broad economy.

A deeper look into the underlying constituents of the ISM Non-Manufacturing Index points to continuing strength in the service sector. The new orders component, which reflects the level of new orders from customers, posted a reading of 64.9 in July. This was the highest reading of the new orders index since August 2005 and is also one of the highest on record. The employment component of the Non-Manufacturing Index also showed strength in July, posting a reading of 56.0. This was higher than the 54.4 reading in June but it is still lagging the broad Non-Manufacturing index. Given that the new orders index has increased significantly from 50.4 in December 2013 to 64.9 in July, we could see significant growth in service sector employment during the second half of the year if companies start to hire additional employees in order to keep pace with the increased demand.