A measure of U.S. services sector activity fell to a four-year low in June as orders plunged, potentially suggesting the economy lost momentum at the end of the second quarter. The Institute for Supply Management (ISM) said its non-manufacturing purchasing managers’ index (PMI) fell to 48.8 last month from 53.8 in May, the lowest level since May 2020. It was the second time this year that the PMI has fallen below 50, which suggests the services sector is contracting.
The PMI fell below the 49 level that the ISM says typically indicates expansion in the overall economy. The survey’s measure of business activity fell to 49.6 from 61.2 in May, the first contraction since May 2020. The ISM reported Monday that manufacturing activity deteriorated further in June. However, the surveys may underestimate the health of the economy, with so-called hard data such as consumer spending suggesting modest growth last quarter. The economy is adjusting to higher interest rates, and rising rates are slowing demand.
Growth expectations for the second quarter are around a 2% annualized rate. The economy grew at a 1.4% pace in the January-March quarter. The survey’s new orders measure fell to 47.3 from 54.1 in May, the lowest level since December 2022. Employment in the services sector continued to decline. That suggests slower job growth in the coming months, although sentiment surveys are not reliable predictors of wage growth. Services inflation eased slightly last month. The ISM’s gauge of prices paid for service inputs slipped to 56.3 from 58.1 in May. That suggests deflationary trends are back on track after price pressures intensified in the first quarter.
