U.S. services sector growth eases in June as employment returns to expansion

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US services sector growth in June

Highlights

ISM's nonmanufacturing PMI slips to 54.0 in June from 54.5 in May, showing services sector expansion is slowing but ongoing.
Prices-paid index drops to 67.7 from 71.3, indicating easing services inflation amid improved but still strained supply chains.
Services employment index returns to expansion at 51.2, supporting expectations for Federal Reserve rate hikes as labor market stays resilient.

June survey points to slower demand and easing price pressure

As reported by Reuters, citing the Institute for Supply Management, its nonmanufacturing purchasing managers index edges down to 54.0 in June from 54.5 in May, still signaling expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.

A measure of new orders received by services businesses falls to 55.1 after rising to 57.3 in May, while order backlogs increase. The pattern mirrors ISM manufacturing data released last week, after businesses had rushed to place orders during the U.S.-Israeli conflict with Iran, a period that lifted commodity prices including oil.

With Washington and Tehran now under a ceasefire and oil prices last month back near pre-war levels, services inflation slows somewhat. The prices-paid index drops to 67.7 from 71.3 in May, though it remains high, and supplier deliveries improve only slightly to 54.4 from 55.2, indicating delivery times are still lengthening amid strained supply chains rather than strong demand.

Labor market resilience keeps rate-hike expectations in focus

The survey’s services employment measure rises to 51.2 from 47.9 in May, returning to expansion and reinforcing economists’ view that the labor market remains in a low-hire, low-fire phase. That reading offsets some concern after broader June job growth slows considerably and prior months’ nonfarm payroll gains are revised lower.

The broader growth outlook remains modest. The Atlanta Federal Reserve’s model estimates second-quarter gross domestic product is increasing at a 1.2% annualized rate, partly reflecting what appears so far to be a wider goods trade deficit, after the economy grows at a 2.1% pace in the January-March quarter and consumer spending nearly stalls.

Most economists still expect the Federal Reserve to raise interest rates this year. The U.S. central bank last month leaves its benchmark overnight rate in the 3.50%-3.75% range, while updated quarterly projections show policymakers expect borrowing costs to move higher.

Our earlier article on WTI oil staying under pressure explained that crude gave back much of its geopolitics-driven rally as OPEC+ signaled higher August output and shipping risks through the Strait of Hormuz eased. It also noted that falling U.S. inventories offered partial support, but the technical setup pointed to fading bullish momentum as traders increasingly pivoted toward demand indicators and Fed-related macro catalysts.

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