Services sector holding up well for now

In the face of the downturn in manufacturing, the services sector is still holding up well. Indeed, the business activity index of the services PMI survey suggests that output in the sector is growing by about 1.5% y/y. The strength of the more domestically-focused services sector is related to the continued improvement in the labour market, with the number of unemployed people falling in July to its lowest level in almost 11 years. However, surveys of firms’ hiring intentions suggest that employment growth will slow later this year. And the surveys also show that labour shortages are easing, which helps to explain why some of the timelier national measures of wage growth have begun to soften. So with household income growth likely to weaken, we think that the services sector will soon start to lose pace.