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U.S. Service Sector Growth Unexpectedly Accelerates In July

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After reporting a substantial turnaround in U.S. service sector activity in the previous month, the Institute for Supply Management released a report on Wednesday showing the pace of growth in the sector unexpectedly accelerated in the month of July.

The ISM said its non-manufacturing index inched up to 58.1 in July after spiking to 57.1 in June, with a reading above 50 indicating growth in service sector activity. Economists had expected the index to drop to 55.0.

"This reading represents growth in the services sector for the second straight month after contraction in April and May, preceded by a 122-month period of expansion," said Anthony Nieves, Chair of the ISM Services Business Survey Committee.

He added, "Respondents remain concerned about the pandemic; however, they are mostly optimistic about business conditions and the economy as businesses continue to reopen."

The unexpected uptick by the headline index was partly due to a notable acceleration in the pace of growth in new orders, with the new orders index jumping to 67.7 in July after soaring to 61.6 in June.

The business activity index also rose to 67.2 in July after skyrocketing 66.0 in June, pointing to a modest acceleration in the pace of growth.

Meanwhile, the report said the employment index edged down to 42.1 in July from 43.1 in June, indicating employment activity in the service sector contracted for the fifth month in a row.

The prices index also dropped to 57.6 in July from 62.4 in June, suggesting prices rose at a slower pace compared to the previous month.

"Looking ahead, we expect the ongoing health crisis to constrain the recovery of non-manufacturing activity to a low growth mode," said Oren Klachkin, Lead U.S. Economist at Oxford Economics.

He added, "Further, the economy will remain at risk of a renewed downturn so long as a vaccine or therapeutic for the virus remains out of reach."

On Monday, the ISM released a separate report showing a bigger than expected acceleration in the pace of growth in U.S. manufacturing activity in the month of July.

The ISM said its purchasing managers index rose to 54.2 in July from 52.6 in June, with a reading above 50 indicating growth in manufacturing activity. Economists had expected the index to inch up to 53.6.

With the bigger than expected increase, the purchasing managers index reached its highest level of expansion since March of 2019.

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