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Services Sector Improves, Inflation Falls

Overview: Over the past week, the economic data continued to reflect a stronger than expected recovery following the partial shutdown due to the pandemic. Mortgage rates held relatively steady near record-low levels.


The major economic reports have broadly revealed a rapid rebound in June and July from the historic weakness seen in April and May, and this week’s data from the services sector continued the trend. The Institute for Supply Management (ISM) Services Index rose to 58.1, which was well above the consensus forecast of 55 and the highest level since February 2019. Services account for over two-thirds of U.S. economic activity, and readings above 50 indicate an expansion in the sector.

The decline in economic activity due to the coronavirus has caused inflation to fall, which has helped keep mortgage rates low. In June, the core Personal Consumption Expenditures (PCE) Price Index was just 0.9% higher than a year ago, which was down from an annual rate of increase of 1% last month. Core PCE is the inflation indicator favored by the Federal Reserve (Fed), and officials have stated that their target level for annual inflation is 2%.

Gross domestic product (GDP) is the broadest measure of economic growth. Economists had long been forecasting massive declines of around 30% to 35% for the period from April through June due to the pandemic, and the actual report revealed that second-quarter GDP fell a record 32.9% on an annualized basis. Early estimates for third-quarter GDP growth are about 20%, which reflects the improvement in more recent economic data.

Week Ahead

Looking ahead, investors will continue watching for news about plans for reopening the economy, medical advances to fight the pandemic, Fed monetary actions, and government stimulus programs. Beyond that, the monthly Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The Consumer Price Index (CPI) will come out on August 12. CPI is a widely followed monthly inflation report that looks at the price change for goods and services.

ISM Services Index

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