Upside ISM Services Surprise Underlines Demand Resilience In Q3

August's ISM Services reading came in strong at 54.5, beating expectations of a drop to 52.5 from July's 52.7, and above the high end of analyst expectations of 53.9.

• This reacceleration to the highest reading since February after a dip in July added further evidence that the US economy has been resilient through Q3, with the ISM noting the 54.5 print is consistent with 1.6% Q/Q annualized real GDP growth (albeit that's lower than most current estimates).
• The report showed strength across most key categories, including Production/Activity (+0.2 to 57.3), Employment (+4.0 to 54.7), New Orders (+2.5 to 57.5), New Export Orders (+1.0 to 62.1), and Prices (+2.1 to 58.9). The Employment reading was the highest since Nov 2021, New Orders highest since Feb, Prices Paid since April, and New Export Orders since September 2022.
• As ISM Services chair Anthony Nieves told MNI at the start of August after the July report regarding New Orders, "I expect this to rebound a little bit as well and get more into the mid 50s on the composite [PMI] as we get into the tail end of of the third quarter and going into the fourth quarter", basing his optimism on seasonal factors.
• August's wasn't an unambiguously positive report. Inventories jumped (+7.3 to 57.7) but Inventory Sentiment rose (+4.9 to 61.5), the latter indicating that firms felt their inventories were too high vs activity levels.
• Backlogs fell the most in series history back to 1997 (-10.3 to 41.8) with some respondents citing the arrival of long-awaited shipments, but the ISM noted that 49% of respondents didn't measure backlogs.