US services sector grows more than expected in August

Activity in the US services sector grew more than expected in August, according to data released on Thursday.

The Institute for Supply Management's services index rose to 58.5 from 55.7 in July, beating expectations for a reading of 56.8.

The business activity index advanced to 60.7 from 56.5, while the new orders index printed at 60.4 from 57 in July. The employment index increased to 56.7 from 56.1 and the prices index fell to 62.8 last month from 63.4 in July.

Michael Pearce, senior US economist at Capital Economics, said the increase in the ISM non-manufacturing index suggests the economy has sustained its recent momentum well into the third quarter.

"On past form, a weighted average of the ISM surveys is now consistent with economic growth in excess of 5% annualised, from 4.2% in the second quarter," said Peace. "We doubt that economic growth will be that strong, especially since the alternative Markit PMI has been far more downbeat, pointing to growth of just 2.5% annualised. Our forecast for third quarter GDP growth remains 3.0-3.5%, which would still be well above trend and enough to keep the Fed raising interest rates gradually."

Pantheon Macroeconomics said that headlines aside, the key number in the report is the employment index. "The weakness of the previous three months, triggered by the initial imposition of tariffs on metals, has been reversed, and the index is now consistent with labour demand running at 250K-plus. Payrolls probably can't rise that quickly, given the tightness of labour supply, but the survey is comforting in the light of the soft July official payroll numbers and today's ADP report."