Yahoo Finance US Services Activity Contracts at Fastest Pace in Four Years
(Bloomberg) -- The US services sector contracted in June at the fastest pace in four years due to a sharp pullback in business activity and declining orders.
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The Institute for Supply Management’s composite gauge of services slumped 5 points to 48.8. Readings below 50 indicate contraction, and the June figure was far weaker than all forecasts in a Bloomberg survey of economists.
The ISM’s business activity index — which parallels the group’s factory output gauge — plunged 11.6 points last month, the steepest slide since April 2020. Orders placed with service providers shrank for the first time since the end of 2022.
The figures represent an abrupt and marked reversal from the prior month, when the overall measure rallied to a nine-month high. The June deterioration in the services gauge that covers the largest part of the economy suggests a further moderation in growth.
Treasury yields sank and stocks rose after the figures reinforced the case for Federal Reserve interest-rate cuts.
“We’re hoping that this is a blip,” Steve Miller, chair of the ISM Services Business Survey Committee, said in an interview on Bloomberg Radio. “It didn’t seem like a shock from the overall commentary, but it certainly wasn’t good news.”
At the same time, the figure stands in stark contrast to S&P Global’s services index, which showed a quicker rate of expansion. That group’s gauge edged up to 55.3, the highest since April 2022.
Combined with a third-straight month of contraction in the ISM manufacturing gauge, reported earlier this week, the group’s survey of service providers indicates demand is feeling a greater strain from high borrowing costs, cooler business investment and uneven consumer spending.
Eight services industries reported a contraction in June, including real estate, mining and retail trade. Eight sectors reported growth.
‘Flat or Lower’
“Survey respondents report that in general, business is flat or lower, and although inflation is easing, some commodities have significantly higher costs,” Miller said in a statement.
ISM’s measure of prices paid by service providers for materials eased to a three-month low, indicating a gradual cooling in inflation.
The services survey also showed employment shrank for a fifth month, while inventories contracted at the fastest pace since October 2021. A measure of inventory sentiment jumped to the highest level since 2017, indicating a larger share of companies see their stockpiles as too high.
Order backlogs fell sharply in June, with the gauge showing the fastest rate of contraction since August of last year. An index of export orders for services, while still growing, slid 10.1 points to 51.7 in a sign of sluggish overseas demand.
Select ISM Industry Comments
“Sales and traffic remain soft compared to last year. High gas prices in California and constant news about inflation and restaurant menu prices are culprits.” — Accommodation & Food Services
“Costs seem to have stabilized but are still higher. The company is holding steady to see what the election will hold.” — Construction
“Steady, with no major shifts in pricing or availability of services.” — Finance & Insurance
“Demand for services has moderated after near-record patient levels in the last month.” — Health Care & Social Assistance
“We are still experiencing supply chain challenges with the increased cost of chemicals, as well as the domestic and overseas freight costs associated with them.” — Management of Companies
“Slightly higher prices across the board, but less pricing pressure for some items.” — Public Administration
“Inflation continues to be a general concern for both purchasers and sellers. For example, with inflation continuing, will customers have enough discretionary funds to spend?” — Retail Trade
“Market seems to be slowing in June. This is complicated by increased ocean freight rates and tight container bookings.” — Wholesale Trade
“The tone of the report does not point to the degree of extreme change that the headline index would suggest,” Stephen Stanley, chief economist at Santander US Capital Markets LLC, said in a note.
“If the economy were suddenly sinking into recession, you would expect respondents to reflect that. Several did note a moderation, but the overwhelming theme, cited in 8 of the 10 comments, was high and/or rising prices,” he said.
--With assistance from Chris Middleton and Mark Niquette.
(Adds comment from ISM, economist’s comment)
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