US ISM Services Sector Growth Slower in June but Marks 2 Years of Expansion as Easing Energy Costs, Lower Inventories Indicate Stabilizing Supply Chains

–ISM’s Miller: Inflationary Pressures from Fuel Prices Expected to Continue Easing but Prices Index Still Elevated

By Max Sato

(MaceNews) – U.S. services sector expansion slowed slightly in June after accelerating in May but remained in growth territory for two years in a row, with easing in energy prices and a pullback in inventories pointing to stabilizing supply chains in the face of U.S. tariffs and the Mideast conflict, industry data released Monday showed.

The purchasing managers index for services compiled by the Institute for Supply Management, which indicates direction of activity, slipped 0.5 percentage point to 54.0 after rising 0.9 point to 54.5 in May, coming in largely in line with the consensus forecast of 54.1. The index has been fluctuating month to month, falling 2.1 points to 54.0 in March after rising 2.3 points to a more than three-year high of 56.1 in February. The index is 0.9 point above its 12-month moving average of 53.1 in June and stayed above the average for the ninth straight month.

“The more than 2-percentage point drops in both the business activity and new orders indexes were partially offset by the 3.3 percentage point increase in the employment Index,” ISM Services Business Survey Committee Chair Steve Miller said in a statement. “All four subindexes of the services PMI are once again in expansion territory and above their 12-month averages.”

Inflationary pressures are still mainly driven by higher costs related to stiff import tariffs imposed by the U.S. government but surveyed firms commented less frequently on fuel prices. The June report also showed the inventories index dropped to its second-lowest level since October 2025 after the outbreak of the Iran war had triggered rush purchases. The imports index dropped into contraction territory for the first time in five months while the backlog orders index reached its second-highest level in nearly four years.

“These readings, taken with respondent commentary, seem to indicate that supply chains are stabilizing amid sustained business activity, giving confidence to businesses that selective, yet modest, increased employment is warranted,” Miller said in the report.

Comments from ISM members indicate that some of the pricing and supply chain issues are industry-specific.

“We continue to experience higher prices due to the Persian Gulf conflict through rising diesel fuel costs and increased input costs for resin-based packaging,” a firm from the accommodation and food services industry told the ISM. “The brunt of the impact will be experienced in the third quarter of 2026, but we are feeling the impact now.”

Bad weather reduced spring crops harvest has pushed up cost increases in feed expense while higher costs for fertilizers and transportation caused by the Mideast conflict have boosted costs above breakeven levels for many farms, a firm from the agriculture sector said.

“The utility industry continues to experience extended lead times, supply-chain constraints, material shortages, and pricing volatility,” a utilities company said.

The World Cup soccer games that are taking place from June 11 to July 19 in the United States, Canada and Mexico helped employment gains in accommodations and food services in June but they account for only 3% of the U.S. GDP and are not a driver behind the employment index increase, Miller told reporters. He expects “temporary” support from the games to continue in July.

Price pressures from fuel prices are expected to ease further after global crude oil prices have slipped to around pre-Iran war levels, Miller said but also cautioned that the prices index at 67.7 in June is still among the highest since the pandemic.

Judging from the comments from surveyed firms, he said, “It doesn’t seem that …. the increase in employment was one of the things that’s driving pricing levels.”

All the four sub-indexes that directly factor into the services PMI were in expansion territory (prior figures in parentheses).

Business activity 55.4 (57.7) -2.3; The index rose 2.5 points to 59.9 in February to hit the highest since 59.9 in May 2024 before slumping 6.0 points in March to 53.9, the lowest since 49.9 in September 2025.

New orders 55.1 (57.3) -2.2; The index rose 2.0 points to 60.6 in March to hit the highest since 61.6 in February 2023 before slipping 7.1 points to 53.5 in April.

Employment 51.2 (47.9) +3.3; Above the neutral level of 50 for the fourth time in the past 12 months. The index slumped 6.6 points to 45.2 in March, falling to the lowest since 43.7 in December 2023, only a month after it rose 1.5 points to 51.8 to reach the highest since 53.9 in February 2025.

Supplier deliveries 54.4 (55.2) -0.8; The index indicated slower performance for the 19th month in a row (above 50 means slower deliveries).

Among other sub-indexes:

Prices 67.7 (71.3) -3.6; Above 60 for 19 months in a row. May’s 71.3 was the highest since 72.6 in August 2022. The index fell 3.6 points to 63.0 in February, the lowest since March 2025 (60.9)

Inventories 51.2 (62.5) -11.3; The index is at a five-month low. It rose 9.4 points to 62.5 in May, matching the record high of 62.5 hit in May 2010.