Signs that the U.S. economy is facing stagflation were evident in the latest readings on activity in the services sector for July, warn economists from the Bank of Montreal (BMO).
The ISM Services Index — a report from the Institute for Supply Management (ISM) that tracks data from purchasing and supply executives — declined last month to 50.1 from 50.8 in June. While the reading remains just above the 50 mark, which reflects the line between expansion and contraction, many of the report’s details were negative.
“It was a disappointing and ugly ISM Services report for July,” BMO said in a research note. “Stagflationary impacts already appear to be rocking the services sector to a greater extent than previously anticipated.”
Among other things, the index’s readings for inventories, new order activity and employment all declined.
“Ominously, imports, employment and new export orders fell deeper into contraction territory last month,” BMO noted.
At the same time, the report signalled growing inflation pressures.
“This ISM Services report for July reinforces the message we got from the July employment report on Friday that economic activity and job growth are sputtering under the weight of higher tariffs, increasing inflation and rising economic policy and trade uncertainty,” BMO said.
These kinds of negative readings may push the U.S. Federal Reserve Board to cut rates, it added.
“This report adds to the evidence that the Federal Reserve is stuck in a stagflationary bind, but will likely soon need to look through rising prices to help support a deteriorating labour market by cutting interest rates. We look for a rate cut in September,” the report concluded.