–ISM Services Index at 48.8 vs. 53.8 in May, Below Median Forecast 53.0; Lowest Since 45.4 in May 2020
–Business Activity Subindex Plunges to Fresh 4-Year Low; New Orders Post 1st Contraction Since December 2022
–Employment Index Below 50 Neutral Line for 5th Straight Month; Prices Paid Index Eases but Remains High
By Max Sato
(MaceNews) – Business activity in the U.S. 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 elevated costs, according to the latest survey by the Institute for Supply Management (ISM) released Wednesday.
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 was a reduction in the number of companies that criticized high interest rates as an inhibitor to their business in the June report. “Maybe they are getting used to them,” he said.
Miller said there had been a seasonally surprising decline in business activity at real estate, rental & leasing firms and a drop in employment at hotels and food services, entertainment and recreation in June, the start of the busy summer season.
There were a few positive comments from the surveyed firms in June that sales were stable, showing not much change from a year earlier, Miller said. 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.”
A firm in the management of companies and support services category reported similar issues: “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.”
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.
In January, deliveries were delayed by bad weather in some U.S. regions, the impact of attacks in the Red Sea, which prompted shipping firms to avoid the Suez Canal in Egypt, as well as congestion at the drought-hit Panama Canal, a key route for cargo going between Asia and the U.S. East Coast.
The inventories index contractedafter two months of growth. It slumped 9.2 points to 42.9 in June, the lowest since 42.2 in October 2021, after falling 1.6 points to 52.1 in May, surging 8.1 points to 53.7 in April and falling 1.5 points to 45.6 in March.
The index for backlog orders, which is tied directly to efficiency in the upstream of supply chains, fell 6.8 points to 44.0 after edging down 0.3 point to 50.8 in May and rising 6.3 points to 51.1 in April. It is remains above 40.9 in May 2023, which is the lowest since 46.4 in May 2009.
The new export orders index remains volatile, falling 10.1 points to 51.7 in June after soaring 13.9 points to an eight-month high of 61.8 in May and slipping 4.8 points to a six-month low of 47.9 in April.