Services economy contracted in June, following growth in May, continuing a recent uneven path, according to the new edition of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).
The June Services PMI, at 48.8 8 (a reading of 50 or higher signals growth), fell 5.0% compared to May’s 53.8 reading, which was preceded by a 49.4 April reading that marked the first time the Services PMI contracted since December 2022, when it came in at 49 and prior to that the last month seeing contraction was in May 2020, when it came in at 45.4.
The June Services PMI is 3.3% below the 12-month average of 52.1, with August 2023’s 54.1 marking the high for that period, and June’s 48.8 marking the low mark for that period.
ISM reported that eight services sectors it tracks saw gains in June, including: Other Services; Management of Companies & Support Services; Health Care & Social Assistance; Construction; Utilities; Finance & Insurance; Educational Services; and Professional, Scientific & Technical Services. Services sectors reporting declines included: Agriculture, Forestry, Fishing & Hunting; Real Estate, Rental & Leasing; Mining; Retail Trade; Public Administration; Wholesale Trade; Transportation & Warehousing; and Information.
The report’s equally weighted subindexes that directly factor into the NMI were down from May to June, including:
Comments from ISM member panelists included in the report highlighted various issues being seen in the services sector.
A Retail Trade panelist observed that inflation continues to be a general concern for both purchasers and sellers, noting that with inflation continuing, it raises the question of: will customers have enough discretionary funds to spend?
And a Management of Companies & Support Services panelist said his company is still experiencing supply chain challenges with the increased cost of chemicals, as well as the domestic and overseas freight costs associated with them.
Steve Miller, Chair of the ISM’s Services Business Survey Committee, said in an interview that the June report is reflective of things moving around, from month-to-month, in terms of volatility, coupled with changes certain services-based companies have seen in recent months, with April going from contraction to growth and May going from growth to contraction.
“The decline in New Orders is a significant shift, as was Business Activity/Production going from pretty high to flattish,” he said. “We will be watching those closely over the next two months. If we see those declines continue, that could be a red flag, but we need to see what happens.”
Even though the Services PMI and the report’s key metrics were down in June, Miller pointed out that various respondents indicated that market conditions, in some cases, are not as bad as the report’s numbers may suggest, with some panelists highlighting things like: stabilizing sales; no major shifts in pricing or availability; sales coming in slightly above plan; steady business levels; and meeting financial projections, among others.
Looking at the first six months of 2024, Miller said that the services sector has seen moderate growth, which he said was expected, despite the decline in the June Services PMI.
“Going from [Services PMI] readings of 51.4 to 49.4 to 53.8 to 48.8, if you take out the 53.8, its 51, 49, 48,” he said. “We will take a really close look next month, for the traditional Services industries, where we see strength in the summertime to see if they come back or not.”
As for the second half of 2024, he explained that due to the panelists’ commentary around costs and prices, it also correlates to employment.
“If people are not employed, they are not spending,” he said. “So, if people are compensating for costs with reductions in labor, which we saw in June, as well as other declines in [recent months] is something that needs to be closely watched. The overall strength of businesses is going to be what drives things. If the Business Activity/Production level sees some increased strength, that will help, and needs to be watched along with Employment.”