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The ISM Services Index Further Validates Boomflation

The ISM Services Index, which represents about 70% of the economy, rose to a six-month high in August, exceeding all estimates in a Blomberg survey of economists.  The surprisingly robust figures highlight the enduring strength of the economy in the face of the most aggressive Fed in history.

The ISM Services Employment Sub Index rose to the highest level since November 2021, the new order index rose to a six-month high and exports expanded at the fastest pace in nearly a year.

Costs for material and wages continued to accelerate in August with the group’s prices paid index rising to a four-month high.

The only negative component of the report was a build in inventories to the highest since April 2020.

As indicated, this is another data point that is exceeding estimates, confounding many—including the Federal Reserve–who earlier in the year had suggested the economy would be mired in a recession by this time.

One widely followed, unofficial estimate produced by the Atlanta Fed now has the economy expanding by 5.6% on an annualized basis in the third quarter.

If this growth rate were to materialize, it would be the third greatest growth rate since the start of the millennium and the greatest growth since 3Q03 [Ex COVID distortions]

This begets the next question. If the economy is expanding at the greatest pace since 2003 and unemployment is hovering around all-time lows, then why do almost 70% believe the economy is going in the wrong direction?

Perhaps it is inflation.  According to government statistics, a family of four is spending $700 more a month on the same basket of goods today than two years ago.  Household wages have not increased $8,400 during the last two years hence the downtrodden views.

I ask what happens to sentiment if the economy does enter a recession where joblessness increases?  Moreover, what happens to deficit assumptions given the propensity of Congress to increase spending to stimulate the economy during recessions?

At the time of this writing, based upon today’s data, the odds of an interest rate hike in late September is now around 60% up from last week’s odds of 40%.

Because of the data, both the equity and Treasury market sold off yesterday fearing yet more rate increases to slow the economy.

There was little reaction to the Beige Book, or the statistical compilation utilized at the upcoming Fed meeting. 

Last night the foreign markets were mixed.  London was up 0.32%, Paris up 0.31% and Frankfurt up 0.6%..  China was down 1.14%, Japan down 0.75% and Hang Seng down 1.34%.

Futures are bifurcated as Dow futures are flat and NASDAQ’s down 0.65%.  The 10-year is up 2/32 to yield 4.28%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.