US Daily Economic Update

Pace of US Services Sector Growth Continues to Moderate

The non-manufacturing ISM index continued to slip in July, coming in at 54.8, below the consensus forecast for a 56 print and June’s 57 reading. The lower-than-expected index reading is consistent with a moderating pace of services industry growth. The rise in the employment and price sub-indexes should leave Treasuries under downward pressure despite the below-consensus read in the overall index and provide a lift for the dollar.

Five of the sub-indexes were up and three were down relative to June’s readings. Most importantly, the services sector employment sub-index rose alongside the price index. These two sub-indexes along with the recent releases of other July indicators suggest that third-quarter growth will likely come in above the second-quarter’s 2.5% gain in real GDP.

Some of the Fed’s concerns that the economy may be slowing too quickly have most likely diminished this week. With indications that the pace of price increases is increasing and, therefore, pushing inflation in the services sector higher, markets are likely to push up the chances of another Fed rate hike. 

Policymakers will need to be vigilant in order to balance an economy that is entering a stage of roughly 3% growth, while core inflation is showing signs of increasing from already unacceptably high levels relative to the Fed’s comfort level. 

In the near-term, policymakers are likely to move to the sidelines as they wait to see if other July indicators also point to stable 3% growth. RBC expects that the Fed will raise the policy rate one more time this year, with a 25 basis-point increase likely to come in October as it signals to markets that it will not tolerate more upward pressure on core inflation.

Strong Rise in US Factory Orders Bodes Well for Investment Outlook

Manufacturers’ new orders rose by 1.2% following May’s 1.0% increase with durable goods orders rising by a strong 2.9%. This rise placed the level or orders at the highest since the series was first started on a NAICS basis in 1992. 

The preliminary report showed durable orders had increased by 3.1%. Non-durable goods orders fell 0.7%.  Orders for non-defence capital goods excluding aircraft or core orders, which correlate well with machinery and equipment investment, came in with a gain of 0.4%. Unfilled orders continued their gains, rising 1.6%, the 13th rise in the past 14 months. Inventories were up 0.8%, in the month. 

The 0.4% rise in core orders is supportive for investment in machinery and equipment in the second quarter and sets the stage for continuing investment in that sector in the third. 

Given their view that the U.S. economy will continue to moderate, the strong increase in factory orders gives the Fed food for thought when assessing the impact of past interest rate increases on the economy. 

US Initial Jobless Claims Rise