The ISM Services Index continued to grow but at slower pace, shedding 0.6 percentage points (ppts) in June with a reading of 55.3, which is higher than the 54 expected by the consensus estimate. Combined with an increase in the manufacturing reading, the ISM composite moved to 55.0 from 55.9 in May.
Business activity rose by 1.6 ppts to 56.1, while new orders declined by 2 ppts to 55.6.
Supply bottlenecks continue to create challenges. The supplier deliveries index gained 0.6 ppts to 61.9, while the backlog of orders sub-index rose by 8.5 ppts to 60.5.
Inventories contracted by 3.5 ppts from 51 in May, while inventory sentiment remained in contractionary territory with a reading of 46.2 – gaining 1.7 ppts.
Employment activity moved back in the contractionary territory losing 2.8 ppts to reach 47.4.
The prices paid component eased for the second consecutive month in June, dropping 2 ppts to 80.1 percent from 82.1 in May.
All 18 industries expanded in June.
Key Implications
The ISM services index continued to lose momentum in June, but remained in expansionary territory for the 25th consecutive month. The composition of the index makes an interesting story. Demand remained healthy with solid gains in business activity, a healthy level of new orders, and inventories too low for the level of demand. But the services sector continues to struggle with a mismatch between supply and demand, unlike the manufacturing sector where supplier delivery times normalized in June.
The employment sub-index disappointed in June. In the past six months, it has been zig-zagging in and out of contractionary territory and is unlikely to serve as a good precursor of the upcoming employment report. Indeed, the contraction is not indicative of a decline in demand for labor as managers expressed their frustration with comments like ” unable to fill positions with qualified applicants”.
All in all, despite the deceleration in June, the services sector remains solidly in expansionary territory, suggesting there is still some gas left in the consumption tank of the U.S. economy.
