Strong Demand Boosts US Services Sector Activity in August

US services sector activity rose in August due to strong demand, according to data released by the Institute for Supply Management (ISM). The nonmanufacturing Purchasing Managers' Index (PMI) advanced to 55.4 last month from 54.1 in July. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of US economic activity.

The current PMI level is consistent with solid economic growth in the third quarter. The survey's measure of new orders received by services businesses surged to 60.9, the highest reading since February 2023, from 57.2 in July. This aligns with robust domestic demand, partly fueled by an artificial intelligence spending boom.

However, supply chains remained stretched last month, and supplier delivery performance eased to 51.3 from 52.8 in July. The survey's measure of prices paid by businesses for inputs increased to 72.6 from 70.3 in July, suggesting inflation could stay above the US central bank's 2% target.

Financial markets are pricing in a roughly 64% chance that the Federal Reserve will raise its benchmark overnight interest rate by 25 basis points at its September 15-16 policy meeting. The current rate is set between 3.50%-3.75%. Despite the surge in orders, services sector employment remained subdued last month.