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.
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