Service Sector Study Suggests Continued Expansion in June

The Institute for Supply Management Composite Service Index slipped to 55.3% in June, down 0.6 points from 55.9% in the previous month. The index remains above the neutral level and points to the growth of the services sector for the 25th month in a row. However, the June result is also the slowest since May 2020, suggesting that the pace may have slowed down somewhat (see the top of the first chart).

Among the key components of the Composite Services Index, the PMI added 1.6 points to 56.1 (see the top of the first chart). This is the 25th month above 50. However, the three-month average was 56.6, lower than the ten-year average of 58.7 from 2010 to 2019 during the last economic recovery.

The index of new orders in the services sector fell to 55.6% from 57.6% in May, down 2.0%. June was the third lowest result of the current expansion and well below the 69.0 reading since October 2021 (see bottom of first chart). However, the new orders index has been above 50 percent for 25 straight months.

The Non-Manufacturing New Export Orders Index, a separate index that measures only export orders, also weakened in June to 57.5% from 50.9% in May. Six industries reported an increase in export orders versus four that reported a decline. However, of all respondents, only about 21% said they carry out and monitor certain activities outside the United States.

Backlogs in the service sector likely rose again in June as the index rose to 60.5 percent from 52.0 percent. June was 18th month in a row with a growing backlog. Ten industries reported an increase in backlogs in June, while four reported decreases.

The index of employment in the services sector decreased in June, amounting to 47.4% compared to 50.2% in May. This is the third time in the last five months that the employment index has fallen below the neutral level (see bottom of the first chart). A weak value reflects a lack of supply rather than a lack of demand. Seven industries reported an increase in employment, while five reported a decline. Respondents believe that there is a shortage of skilled labor and that competition remains high.

Supplier Deliveries, a measure of supplier delivery time to non-manufacturing businesses, was 61.9% compared to 61.3% in the previous month (see top of chart two). This suggests that suppliers are even further behind in delivering goods for the service industry, and the backlog has accelerated slightly compared to the previous month. The overall level of the index remains high compared to previous periods, but has declined sharply since index values ​​exceeded 75 in October and November 2021. The manufacturing sector survey is in line with the recent improvement (see the top of the second chart). In the services sector, sixteen industries reported slower deliveries in June, while none reported faster deliveries.

The non-manufacturer price index fell to 80.1 in June, the second consecutive fall from the record high of 84.6 percent in April (see bottom of second chart). All eighteen industries reported higher input prices in June. Price pressure has eased somewhat, but remains strong in both services and manufacturing (see bottom of Chart 2).

The latest report from the Institute for Supply Management says that the service sector and the broader economy expanded in June for the 25th straight month. Survey respondents continue to highlight strong price pressures on raw materials, material and labor shortages, and logistics and transportation issues, although there were also several comments about signs of improvement in some of these areas. Respondents also noted concerns about rising interest rates and signs of consumer spending cuts.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after over 25 years of economic and financial market research on Wall Street. Bob previously led the Global Equity Strategy division of Brown Brothers Harriman, where he developed an equity investment strategy that combines top-down macro analysis with bottom-up fundamentals.

Prior to joining BBH, Bob was Senior Equity Strategist at State Street Global Markets, Senior Economic Strategist at Prudential Equity Group, and Senior Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business from Lehigh University.

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