Report On Business® Roundup: June Services PMI®

July 03, 2024
By Dan Zeiger

An unwritten policy of the ISM® Report On Business® is that the numbers speak for themselves: Institute for Supply Management® Business Survey Committee Chairs very rarely make analyses of their sectors and the U.S. economy beyond what the PMI® data indicate.

In his first turn as Chair of the ISM Services Business Survey Committee, Steve Miller, CPSM, CSCP, had an eyebrow-raising answer when — in the wake of surprisingly weak index readings in June — was asked if brighter days were ahead for the sector. “I really wish I could say yes,” he said.

Adhering to policy, Miller continued, “But nothing stands out to me, at least this month, that you could call out.” And a Services PMI® of 48.8 percent, a 5-percentage point decrease compared to May and the second contraction in three months, was just the start of the parade of sobering numbers. For the first time in 18 months, the composite index fell below the threshold of 49 percent that, based on historical PMI® data, indicates growth in the overall U.S. economy.

The data precipitated a dip in treasury yields. However, despite the Services PMI® and a monthly private payrolls report by ADP and the Stanford Digital Economy Lab that also failed to meet expectations, the Nasdaq and S&P 500 finished higher in Wednesday’s abbreviated trading, and the Dow Jones Industrial Average dropped slightly.

To be clear: The Services PMI® has indicated expansion for 46 of the last 49 months and has not recorded consecutive months in contraction since the coronavirus pandemic engulfed the globe in April and May 2020. That reflects consistent growth in the sector, and as the saying goes, one month does not make a trend.

But two months out of three raises flags, especially considering the subindex data and industry trends in the June report. The Business Activity (49.6 percent) and New Orders (47.3 percent) fell a combined 18.4 percentage points, and the Inventories Index dropped 9.2 points to 42.9 percent as companies actively tried to reduce their stocks, aiming to cut costs and respond to sagging demand. (The Business Activity and New Orders indexes directly factor into the Services PMI® calculation; the Inventories Index does not.)

Eight industries reported growth in June, down from 13 the previous month. The largest industry — Real Estate, Rental & Leasing, which accounts for 14.9 percent of services gross domestic product (GDP) — reported the fastest rate of growth among 18 industries in May but contracted in June. The second-largest industry, Public Administration (12.7 percent of sector GDP) was also in contraction.

The Employment Index was down 1 percentage point to 46.1 percent, and Miller noted that such industries as Accommodation & Food Services and Arts, Entertainment & Recreation, which typically boost staffing for the summer months, reported decreases.

“It looks like there’s some weakness on the consumer sector, and that was certainly a surprise to me after the previous month,” Miller said.

The Prices Index dropped to 56.3 percent, firmly in “increasing” territory but a welcome respite compared to the elevated readings as the pandemic raged. But survey respondents indicated that some commodities up in price remain a challenge. “Inflation continues to be a general concern for both purchasers and sellers. For example, with inflation continuing, will customers have enough discretionary funds to spend?” wrote a respondent in Retail Trade.

While Miller said there were fewer comments hopeful for interest-rate reductions compared to previous months, that doesn’t mean such sentiment has waned: “People still think (higher rates) are an inhibitor to investment,” Miller said. “But I think maybe some have gotten used to them.”

Other Services, which include MRO, reported the fastest rate of growth among services industries in June. Miller said that could mean companies are focused on maintaining current equipment and infrastructure instead of making new investments.

The Manufacturing and Services Report On Business® numbers for June remain in line with what ISM’s Semiannual Economic Forecast detailed in May: Until demand picks up, growth in both sectors will be tepid at best through the end of the year.

The July data figures to shed more light on a potential trend. “I don’t think we can call June a dramatic slowdown,” Miller said. “Rather, it could be a sign that there is no significant growth period coming, at least not this month.”

The Report On Business® roundup:

Bloomberg: U.S. Services Activity Contracts at Fastest Pace in Four Years. “The figures represent an abrupt and marked reversal from the prior month, when the overall measure rallied to a nine-month high. The June deterioration in the services gauge that covers the largest part of the economy also adds to evidence the economy is showing more signs of running out of steam.”

Mace News: Services Sector Unexpectedly Slips Back into Contraction; Key Index Hits Lowest Since Early Phase of Pandemic Slump. “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.”

MarketWatch: Businesses Show Biggest Contraction Since Pandemic, ISM Finds. Economy Getting Weaker. “The service side of the economy has powered U.S. growth over the past several years, but some fatigue appears to be setting in. High interest rates and lingering inflation have put a bigger strain on family budgets and households have used up most of their pandemic savings. They have to rely on their incomes for most of their spending now.”

Reuters: U.S. Service Sector Sags in June as Orders Sink. “Economists polled by Reuters had forecast the Services PMI® slipping to 52.5 percent. The survey's new orders measure dropped to 47.3, the lowest since December 2022, from 54.1 in May. Services employment continued to decline. That would suggest softer job growth in the months ahead, though the sentiment surveys have not been reliable predictors of payroll gains.”

In case you missed Monday’s Report On Business® Roundup on the release of the June Manufacturing PMI®you can read it here. The Hospital PMI® will be released on Friday. For the most up-to-date content on the three indexes under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.

(Photo credit: Getty Images/Smederevac)

About the Author

Dan Zeiger

About the Author

Dan Zeiger is Senior Copy Editor/Writer for Inside Supply Management® magazine, covering topics, trends and issues relating to supply chain management.