Implications:  Activity in the services sector accelerated in August, as the headline index increased to a six-month high with thirteen out of eighteen major industries reporting growth, beating even the most optimistic forecast.  Contrast this with the August ISM report on the manufacturing sector – where activity contracted for the tenth month in a row and only five industries reported growth – output is clearly shifting back toward services following the COVID-era when goods-related activity was artificially boosted.  There was plenty to like in today’s report on the services sector.  Business activity and new orders (the two forward-looking categories) both rose in August and sit comfortably in expansion territory.  Notably, respondents cited a post-pandemic environment that has led to higher levels of activity than even they had anticipated.  Meanwhile, demand for labor in the services sector remains strong, with the employment index jumping to the highest level since 2021.  Respondent comments continue to signal that a lack of supply, not demand, has been what’s held back service jobs from moving higher.  On the supply-chain front, the supplier deliveries index contracted for the seventh month in a row, signaling shorter lead times for businesses.  Despite easing supply chains, inflation remains a problem in the services sector.  The prices index rose to 58.9 in August, with twelve industries reporting paying higher prices in the month.  We expect the services sector to keep inflation trending above the Fed’s 2.0% target for some time.  As for the economy, even though services are still expanding, we continue to believe a recession is on the way.  Equity investors should remain cautious as we navigate these unprecedented times.

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