• The Institute for Supply Management’s (ISM) Non-Manufacturing Index improved to 57.1 in June, an 11.7 point increase from May. The June outturn came well above market expectations, calling for a 50.0 print.
  • The improvement was broadbased, with three of the four main subcomponents rising last month. The business activity subcomponent led the way, rising to 66.0 from 41.0. This was followed by new orders, moving higher to 61.6 from 41.9, and employment, which saw a more moderate increase to 43.1 from 31.8 (still in contractionary territory).
  • Meanwhile, the supplier deliveries subcomponent continued to decline, falling to 57.5 from 67.0. Over the last few months, pandemic-related supply problems had pushed this specific subcomponent higher, pointing to slower delivery times and distorting the overall index. In today’s report, the Institute for Supply Management highlighted that the June reading correlates more closely to current supply and demand.
  • Trade indicators also improved on the month. For the first time in four months, import orders grew, advancing by 9.2 points to 52.9 and reflecting an improvement in domestic demand. Likewise, export orders rose by 17.4 points to 58.9, with real estate, rental & leasing; wholesale trade; agriculture, forestry, fishing & hunting; health care & social assistance; utilities; construction; and information all reporting an increase in new exports.
  • The number of industries reporting growth on the month increased from four to 14 out of a total of 18 industries counted in the report. Similarly, most industries reported an increase in prices paid in June, with the prices index jumping to 62.4 from 55.6. Commodities which saw prices edging higher included food items such as chicken and beef, as well as medical supplies and personal protective equipment.

Key Implications

  • Following two consecutive months of contraction, the non-manufacturing sector, like its manufacturing counterpart, finally returned to expansionary territory in June, reflecting improved economic activity as states moved forward with their reopening plans. The recovery also came through in the June employment report, which showed a 4.8 million increase in non-farm payrolls, led by large gains in services industries, notably leisure and hospitality, retail and education and health services.
  • The recent surge in COVID-19 cases, however, is threatening this nascent recovery. Cases are now on the rise in the vast majority of states, resulting in reopening plans being either paused or rolled-back in some parts of the country by late June. Some states have also reinstated restrictions on business activity, thus far mainly targeted at restaurants, bars and other public venues. Already, high-frequency data are showing a slowdown in momentum, suggesting a near-term setback for the services sector. The path to full recovery is expected to be long and difficult for the non-manufacturing sector, and this may be the first of many hurdles riddling that path..

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