| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 53.0 | 52.0 to 55.5 | 48.8 | 53.8 |
Highlights
Business activity in the US services sector unexpectedly slipped back into a second contraction in three months as activity/production posted its biggest plunge since the early phase of the pandemic slump, and some firms continued to cut jobs amid lower new orders and high costs, according to the latest survey by the Institute for Supply Management (ISM).
The ISM index, which shows the directional change of economic activity, fell 5.0 percentage points to 48.8 in June, hitting the lowest since 45.4 in May 2020, after rising 4.4 points to a nine-month high of 53.8 in May and falling 2.0 points to a 16-month low of 49.4 in April. The services sector had been in growth territory for 15 straight months until March this year. The index came in much weaker than the median economist forecast of 53.0 and its 12-month average of 52.1. It also marked the sharpest fall since the 6.2-point drop in December 2022.
"The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020 and continued contraction in employment," Steve Miller, who took office as chair of the ISM Services Business Survey Committee last month, said in a statement."Survey respondents report that in general, business is flat or lower, and although inflation is easing, some commodities have significantly higher costs. Panelists indicate that slower supplier delivery performance is due primarily to transportation challenges, not increases in demand."
Last month, Anthony Nieves, Miller's predecessor, told reporters that he expected the services sector to show"incremental growth" into the summer due to the holiday season and vacation time but he also said more firms were expressing concerns about high interest rates that were preventing new investment in equipment. Miller told reporters that there were a few positive comments from the surveyed firms in June that sales were stable, showing not much change from a year earlier. Overall demand for investing in new capacity remains sluggish but he noted that"there may be a shift toward maintenance and repairs" based on increased business activity in the industry.
Comments from ISM member firms indicate the services sector continues to struggle amid elevated costs."Sales and traffic remain soft compared to last year," a firm in the accommodation and food services industry told the ISM."High gas prices in California and constant news about inflation and restaurant menu prices are culprits." A retailer reported:"Inflation continues to be a general concern for both purchasers and sellers." A wholesaler noted slower market conditions in June, which is"complicated by increased ocean freight rates and tight container bookings."
Of the four sub-indexes that directly factor into the services PMI, the business activity/production index plunged 11.6 points (the sharpest fall since the 22.9-point drop in April 2020) to 49.9 in June, hitting the lowest since 41.2 in May 2020. It followed a 10.3-point jump to an 18-month high of 61.2 in May and a 6.5-point fall to a nearly four-year low of 50.9 in April, which was also the lowest since May 2020. The new orders index fell 6.8 points to 47.3 in June, indicating the first contraction since December 2022, when it slumped 10.2 points to 45.0. The sharp move followed a 1.9-point rise to 54.1 in May and a 2.2-point dip to a 16-month low of 52.2 in April.
The employment index showed contraction for the fifth month in a row and a sixth in the past 12 months. It fell 1.0 point to 46.1 after rising 1.2 points to 47.1 in May and falling 2.6 points to a four-month low of 45.9 in April.
The supplier deliveries index -- the only ISM index that is inversed -- fell 0.5 point to 52.2 after rising 4.2 points to 52.7 in May, when it popped above 50 for the first time in four months and thus indicated that supplier delivery performance was"slower" after being"faster." Earlier this year, the index dipped 3.5 points to a record low of 45.4 in March, which was the fastest deliveries since July 1997, when the ISM began tracking them. A reading of above 50 indicates slower deliveries. That tends to happen when the economy improves and customer demand picks up, but in this case, it is mainly due to recent bad weather and trouble booking containers.
Among other subindexes, the prices paid index remains elevated. It fell 1.8 points to 56.3 in June after slipping 1.1 points to 58.1 in May, rising 5.8 points to 59.2 in April and falling 5.2 points to a four-year low of 53.4 in March, which was the lowest since 50.4 in March 2020 and well below its record high of 83.8 hit in March 2022. The index has been above the neutral line of 50 for just over seven years since 49.6 in May 2017.
The ISM index, which shows the directional change of economic activity, fell 5.0 percentage points to 48.8 in June, hitting the lowest since 45.4 in May 2020, after rising 4.4 points to a nine-month high of 53.8 in May and falling 2.0 points to a 16-month low of 49.4 in April. The services sector had been in growth territory for 15 straight months until March this year. The index came in much weaker than the median economist forecast of 53.0 and its 12-month average of 52.1. It also marked the sharpest fall since the 6.2-point drop in December 2022.
"The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020 and continued contraction in employment," Steve Miller, who took office as chair of the ISM Services Business Survey Committee last month, said in a statement."Survey respondents report that in general, business is flat or lower, and although inflation is easing, some commodities have significantly higher costs. Panelists indicate that slower supplier delivery performance is due primarily to transportation challenges, not increases in demand."
Last month, Anthony Nieves, Miller's predecessor, told reporters that he expected the services sector to show"incremental growth" into the summer due to the holiday season and vacation time but he also said more firms were expressing concerns about high interest rates that were preventing new investment in equipment. Miller told reporters that there were a few positive comments from the surveyed firms in June that sales were stable, showing not much change from a year earlier. Overall demand for investing in new capacity remains sluggish but he noted that"there may be a shift toward maintenance and repairs" based on increased business activity in the industry.
Comments from ISM member firms indicate the services sector continues to struggle amid elevated costs."Sales and traffic remain soft compared to last year," a firm in the accommodation and food services industry told the ISM."High gas prices in California and constant news about inflation and restaurant menu prices are culprits." A retailer reported:"Inflation continues to be a general concern for both purchasers and sellers." A wholesaler noted slower market conditions in June, which is"complicated by increased ocean freight rates and tight container bookings."
Of the four sub-indexes that directly factor into the services PMI, the business activity/production index plunged 11.6 points (the sharpest fall since the 22.9-point drop in April 2020) to 49.9 in June, hitting the lowest since 41.2 in May 2020. It followed a 10.3-point jump to an 18-month high of 61.2 in May and a 6.5-point fall to a nearly four-year low of 50.9 in April, which was also the lowest since May 2020. The new orders index fell 6.8 points to 47.3 in June, indicating the first contraction since December 2022, when it slumped 10.2 points to 45.0. The sharp move followed a 1.9-point rise to 54.1 in May and a 2.2-point dip to a 16-month low of 52.2 in April.
The employment index showed contraction for the fifth month in a row and a sixth in the past 12 months. It fell 1.0 point to 46.1 after rising 1.2 points to 47.1 in May and falling 2.6 points to a four-month low of 45.9 in April.
The supplier deliveries index -- the only ISM index that is inversed -- fell 0.5 point to 52.2 after rising 4.2 points to 52.7 in May, when it popped above 50 for the first time in four months and thus indicated that supplier delivery performance was"slower" after being"faster." Earlier this year, the index dipped 3.5 points to a record low of 45.4 in March, which was the fastest deliveries since July 1997, when the ISM began tracking them. A reading of above 50 indicates slower deliveries. That tends to happen when the economy improves and customer demand picks up, but in this case, it is mainly due to recent bad weather and trouble booking containers.
Among other subindexes, the prices paid index remains elevated. It fell 1.8 points to 56.3 in June after slipping 1.1 points to 58.1 in May, rising 5.8 points to 59.2 in April and falling 5.2 points to a four-year low of 53.4 in March, which was the lowest since 50.4 in March 2020 and well below its record high of 83.8 hit in March 2022. The index has been above the neutral line of 50 for just over seven years since 49.6 in May 2017.
Market Consensus Before Announcement
Backed by new orders, ISM services jumped 4.4 points in May to a better-than-expected 53.8 with June's consensus at 53.0.
Definition
Producing a monthly composite on general activity tracked in volumes, the Institute for Supply Management surveys several hundred service-providing firms from 16 industries (construction and mining are included). The services composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted. For the composite index, a reading above 50 percent indicates that the services economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation: a reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM services index, investors will know what the economic backdrop is for the various markets. The services index is a composite of four equally weighted components: business activity, new orders, employment, and supplier deliveries. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this report goes back to 1997. Note that in 2020 the ISM changed the name of the report to services from non-manufacturing though it continues to track two key goods producing industries: construction and mining.
