- The June ISM services index dropped to 60.1, well below market expectations for 63.5. This marked a 3.9 percentage point decrease from the historically high reading of 64.0 in May.
- Business activity eased by 5.8 ppts to 60.4, while new orders declined by 1.8 ppts to 62.1 from 63.9 in May. The new export orders sub-index was the biggest driver of the slow-down, dropping by 9.3 ppts to 50.7.
- Supply chain disruptions might be moderating with the supplier deliveries index dropping -1.9 ppts to 68.5. Still, the backlog of orders continued to climb with an increase of 4.7 ppts to 65.8 – the highest on record. Inventories dropped by 1.6 ppts to 49.9 while another month of decline in inventory sentiment suggests that the respondents feel that inventories are too low relative to the level of business activity.
- Employment activity dropped into the contractionary territory in June to 49.3 from 55.3 in May. The deceleration points to labor constraints, rather than slowing demand.
- The price index slowed with a 1.1 ppt decline to 79.5 from 80.6 in May. 17 out of 18 industries reported an increase in prices.
- 16 industries expanded in June. The two industries that reported a decrease in the month of June were Real Estate, Rental & Leasing; and Agriculture, Forestry, Fishing & Hunting.
Key Implications
- Despite a marginal slow-down in business activity, the service sector remains firmly in expansionary territory. The major impediments to faster growth remain capacity constraints and labor shortages as businesses are struggling in an environment of slow lead times and intense competition for qualified workers.
- Lack of improvement in the employment sub-index is worrying as it may force some businesses to turn away prospective customers due to inability to service them. Hiring is constrained as the labor force remains depressed with little progress made in June, according to the recent jobs report. Respondents’ comments like “increasingly difficult to find qualified candidates to fill open positions” paint a colorful picture of the current struggles in the job market.
- A moderation in the price index doesn’t mean that price pressures are abating, suggesting that consumers may have to pay more for services they craved for during the lockdowns. Elevated prices paid by producers don’t always result in higher consumer prices, but with soaring demand businesses are usually less reluctant to make their customers pay for higher input costs. Combined with June’s high reading of the manufacturing price sub-index, the CPI reading next Tuesday remains under upward pressure.
