US service sector rebounds in July; employment also recovers

WASHINGTON (Reuters) -U.S. services sector activity rebounded from a four-year low in July amid a bounce back in new orders and the first increase in employment in six months, which could help to quash fears of a recession that have been sparked by a surge in the unemployment rate last month and an ongoing stock market sell-off.

The Institute for Supply Management (ISM) said on Monday that its nonmanufacturing purchasing managers (PMI) index increased to 51.4 last month from 48.8 in June, which was the lowest level since May 2020. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM views readings above 49 over time as generally indicating an expansion of the overall economy.

Economists polled by Reuters had forecast the services PMI rising to 51.0.

The report appeared to help lift U.S. stock market indexes from their early-morning lows, although the benchmark S&P 500 Index was more than 3% lower in the latest leg of a stock market sell-off that has mushroomed into a global equities rout. The S&P has dropped nearly 5% in the last two sessions, its biggest two-day loss in more than two years.

Government data on Friday showed the unemployment rate increased to a nearly three-year high of 4.3% in July from 4.1% in June. The labor market is slowing as the Federal Reserve's hefty interest rate hikes in 2022 and 2023 curb demand.

The U.S. central bank last week kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been for more than a year but opened the door to reducing borrowing costs as soon as its next meeting in September. Financial markets are also expecting rate cuts in November and December.

The ISM survey's new orders measure rebounded to 52.4 from 47.3 in June, which was the lowest since December 2022. Its measure of services employment increased to 51.1 - growing for the first time since January - from 46.1 in June. The five-point rise in the index was the second-largest in more than three years after January's 6.7 point increase.

That would support views that the slowdown in nonfarm payrolls in July did not signal the start of labor market deterioration. Nonfarm payrolls increased by 114,000 last month, the second smallest gain this year, while service providers added just 72,000 jobs - the fewest since December 2020 when both services and overall employment fell.

Steve Miller, chair of ISM's Services Business Survey Committee, noted survey respondents had "generally positive commentary on business activity being flat or expanding gradually."

Services inflation picked up a bit in July, but probably not enough to alter the picture of subsiding price pressures. The ISM's prices paid measure for services inputs edged up to 57.0 from 56.3 in June.

(Reporting by Lucia Mutikani and Dan Burns; Editing by Andrea Ricci)