ISM shows services sector shrinks in June

The ISM services index fell to 48.8 in June from 53.8 in May, well below the consensus of 52.7. Only eight of 18 industries posted gains this month, down from 13 in May.

The business activity and new orders sub-indexes saw activity decline, falling by 11.6 and 6.8 percentage points to 49.6 and 47.3, respectively.

The prices paid component fell to 56.3 percentage points (pp) from 58.1 in May, while the supplier prices component remained at 52.2 (52.7 in May).

The employment component continued to decline (46.1), marking the fifth consecutive month of falling employment.

Key implications

The services sector is getting restless. After a solid rebound in activity last month, the ISM report showed the sector contracted again in June. While April’s print was just shy of 50 (49.4), June’s data is the second time in three months that the index has shown a slowdown in activity in the sector. Moreover, unlike April, both the business activity sub-index and the new orders index fell.

The employment gauge has signaled a recession for the past five months, and new orders and activity joined it in the red this month. After a long period of growth, the services sector appears to be struggling under the weight of tight monetary policy and a slowdown in consumer spending. For the Fed, it is another welcome sign that monetary policy is working to dampen consumer demand beyond the interest-sensitive goods sector.