MNI INTERVIEW: July US Service Sector Strength Won't Last -ISM

U.S. service sector strength seen in July should soon taper off if business restrictions meant to corral the spread of Covid-19 in the U.S. aren't completely reversed in the next few months, the chair of the Institute for Supply Management's monthly services barometer told MNI Wednesday.

Services activity increased in July as establishments continued to adapt to coronavirus-triggered restrictions to occupancy, but that growth isn't sustainable, Anthony Nieves said, and won't result in another years-long expansion seen before the virus shuttered millions of storefronts and restaurants. Many businesses are just barely keeping their heads above water.

"[Activity] will start leveling off again," he said in an interview, noting the surge in Covid-19 cases that hampered state reopenings in July and social distancing measures are "stifling" growth. "While they're still in place, they'll be an impediment for substantial long-term growth."

More than half of all states in July either paused or partially reversed their reopening plans as infection rates surged in states that had been among the first - and the quickest - to reopen.

EMPLOYMENT A 'DRAG'

The ISM Services Index inched up to 58.1 in July from 57.1 in June, marking two consecutive months of growth following record-shattering contractions in April and May. The business activity sub-index increased 1.2 points to 67.2, while the employment index declined to 42.1, slightly lower than June's reading of 43.1, though still signalling contraction. A reading above 50 indicates expansion.

Nieves said the headline index, which measures monthly changes in services activity, won't see any "big spikes" as long as business restrictions are still in place, particularly in populous states like Texas, Florida and California, where new positive Covid-19 case counts have skyrocketed. Growth should be gradual, he said, and will depend almost entirely on how each state individually chooses to respond to the health crisis.

Nieves said employment will "definitely be a drag" on the index moving forward, in part because service-sector jobs involve more social contact than jobs in the manufacturing sector, and aren't able to come back as quickly. And surging Covid-19 cases have prompted renewed calls for social distancing nationwide, meaning most businesses aren't able to operate beyond 50% to 60% of their full capacity, he said.

That spells trouble for businesses like restaurants, for which revenues are directly tied to occupancy levels.

"If occupancy is really way down, there's no way they're going to bring back the workers they had before," he said, adding that occupancy in many businesses has dropped between 10% and 20%. "Staff fluctuates based on volume, and takeout isn't replacing the volume levels they had prior."