Service sector slowdown raises concerns about US growth prospects

Today’s data provided more evidence of a cooling economy and a weakening job market. New claims continued to rise, albeit slowly, while ongoing claims rose to their highest level since November 2021. This suggests that while layoff rates remain low, if you do unfortunately lose your job, finding a new one is becoming much more difficult. But the really eye-catching release is the truly dismal ISM Services Index for June. It fell to 48.8 from 53.8 (consensus 52.7).

That’s lower than every individual forecast sent to Bloomberg, and it’s the worst result in four years, when we were still in the middle of the pandemic, which shows just how bad businesses are feeling. New orders fell to 47.3 from 54.1, business activity collapsed to 49.6 from 61.2, and employment fell to 46.1 from 47.1 (remember, 50 is the break-even level, above which everything is expansion, and below that, recession).

One bit of good news is that prices paid slowed to 56.3 from 58.1, further evidence of easing price pressures. The chart below shows that both the ISM manufacturing and services sectors are in recession territory. This is a significant story, as these have historically been the best indicators of changes in the economic cycle and suggest that downside risks to growth are intensifying.