Service sector slowdown raises concerns about US growth prospects

By James Knightley

Weaker data increases fears of crisis

Today’s data provided more evidence of a cooling economy and a weakening job market. New claims continued to rise, albeit slowly, while continued 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 another position is becoming increasingly difficult. But the really eye-catching message is the truly bleak ISM services index for June. It fell to 48.8 from 53.8 (consensus 52.7).

Below all individual forecasts sent to Bloomberg, it’s the worst result in four years, when we were still in the middle of the pandemic, showing 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, anything above it means expansion and anything below it means recession).

One bit of good news is that prices paid fell to 56.3 from 58.1, providing 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.

ISM research and GDP growth year-on-year

Data increasingly confirms the need for interest rate cuts

This certainly strengthens the case for a September rate cut by the Fed, as it meets all the criteria for weaker growth, slowing inflation, and a worsening labor market. The Fed does not want to trigger a recession if it can avoid it, and if the data begins to allow them to shift to a slightly less restrictive policy, we think they will seize the opportunity. As for Friday’s employment report, if we combine the ISM manufacturing and services employment numbers (and weight them 25%/75%), we are at levels historically consistent with a decline in nonfarm payrolls of 175k, not a gain of 190k as the consensus forecast for Friday. With ADP also looking weak, and both the domestic base and NFIB employment numbers being weak, we see downside risk to our own forecast of 175k.

ISM employment components point to downside risk for non-farm wages

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