US services contract in June, signal broad weakening

Economic activity in the US services sector contracted in June by the most since 2020 while a report earlier this week showed contraction in manufacturing, signaling a broad-based slowdown in the economy as the second quarter came to an end.

The Institute for Supply Management's (ISM) services purchasing managers index (PMI) registered 48.8 in June, down from 53.8 in May. Readings above 50 signal expansion, while those below 50 signal contraction for the services economy.

The June services PMI "indicates the overall economy is contracting for the first time in 17 months," ISM said. "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."

The business activity/production index fell to 49.6 from 61.2. New orders fell by 6.8 points to 47.3. Employment fell by 1 point to 46.1.

Monthly PMI reports can be volatile, but a services PMI above 49 over time generally indicates an expansion of the overall economy.

"Survey respondents report that in general, business is flat or lower, and although inflation is easing, some commodities have significantly higher costs," ISM said.

The prices index fell by 1.8 points to 56.3, showing slowing but robust price gains.

ISM's manufacturing PMI fell to 48.5 in June from 48.7 in May, ISM reported on 1 July. It was the third consecutive month of contraction and marked a 19th month of contraction in the past 20 months.

Wednesday's weaker than expected ISM report, together with a Wednesday report showing initial jobless claims last week rose to their highest in two years, slightly increase the odds that the Federal Reserve may lower its target rate later this year after maintaining it at 23-year highs since last year in an effort to stem inflation.

By Bob Willis