US ISM Non-manufacturing Index Shows Service Sector Expanded in July

The ISM non-manufacturing index indicated that the sector grew for the seventh consecutive month with the pace of expansion unexpectedly increasing, as shown by the index rising to 54.3 in July from 53.8 (a reading above 50 indicates the sector is generally expanding).  Market expectations going into today’s report were for a slight decline to 53.0. The employment sub-index moved into expansionary territory for only the second time in 32 months, rising to 50.9 from 49.7 in the previous month.

The service sector expanded for the seventh straight month in July and the pace of growth rose as the ISM non-manufacturing index increased to 54.3 following June’s reading of 53.8.  The growth in business activity eased to a still strong 57.4 from 58.1 in June, while the pace of growth in new orders increased to 56.7 from 54.4 in the previous month. The employment sub-index moved back into expansionary territory following June’s contraction, registering its highest level since December 2007 at 50.9.  With respect to inflationary pressures, prices paid dropped to 52.7 from 53.8 in June, the lowest level of the year.

As with Monday's ISM Manufacturing Report, today's release suggests that the U.S. economy continued to expand into the third quarter of 2010, although respondents continue to "tilt toward cautious optimism about business conditions". The improvement in the employment sub-index for both ISM reports as well as the better than expected gain in the ADP report bodes well for Friday's July's private sector employment maintaining, or even increasing, from June's gain of 83,000. These employment gains will likely not be enough to put significant downward pressure on the unemployment rate in the near term, and, given the persistently subdued inflationary pressures, we continue to expect the Fed funds target to remain in its current 0.00% to 0.25% range into next year.

The ADP National Employment Report, released this morning, showed that U.S. non-farm private payroll employment increased by a larger than expected 42,000 in July (market expectations were for a gain of 30,000), marking the sixth consecutive monthly increase. The report noted, however, that the average monthly gain during this period has been a “modest” 37,000, with “no evidence of acceleration”.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.