Market CommentariesNon-Manufacturing Activity Expands In August - September 4, 2014

At 10:00 A.M. (EDT) this morning, we received a very encouraging report on non-manufacturing activity for the month of August. It marked the 55th consecutive month that economic activity in the services sector had grown.

Specifically, the Institute for Supply Management said that non-manufacturing activity registered 59.6 last month, 0.9 percentage points higher than the seasonally adjusted July reading of 58.7; an indication that non-manufacturing expanded at a faster-than-expected pace last month. In addition, the Non-Manufacturing Business Activity Index rose to 65.0, which was 2.6 percentage points above the July tally of 62.4 tally and marked the 61st consecutive month of growth there. Moreover, the New Orders Index increased by 1.1 percentage points, to 63.8.

Clearly, non-manufacturing (services) activity has picked up considerably in 2014 and is yet another sign, along with the Institute for Supply Management’s companion report on manufacturing activity (issued on Tuesday), that the U.S. economy is strengthening, even if there are still pockets of sluggishness, like we saw in July’s new home sales report and the latest data on personal income and spending. It should be noted that 15 non-manufacturing industries surveyed reported growth in August, while only two saw a contraction.

Meantime, perhaps the most encouraging sign in the latest report, particularly from the Federal Reserve’s point of view, was the continued improvement in employment activity. Specifically, the Employment Index increased by 1.1 percentage points to 57.1, indicating expansion in employment for the sixth consecutive month. This reading, coupled with this morning’s report from Automatic Data Processing (ADP) that showed private-sector payrolls increased by 204,000 in August had to be well received by the Federal Reserve, which has the dual mandate to promote full employment and keep prices stable.

All in all, the latest report on non-manufacturing activity was not a game changer, but it does reiterate what the Federal Reserve has been saying for quite some time, including in yesterday’s Beige Book summation of economic conditions, which is that the U.S. economy should continue to climb at a modest to moderate pace in the second half of this year. We continue to look for second-half GDP growth in the range of 3.0% to 3.5%, and this latest data on the services sector did nothing to change that thinking.