U.S. Services Sector Expansion Slows to 54.0 in June Amid Easing Inflation

The U.S. services sector expanded at a slower pace in June, with the ISM Non-Manufacturing Index falling to 54.0, a slight decrease from 54.5 in May. This figure, however, matched consensus expectations and indicates ongoing growth in the sector, as any reading above 50 signifies expansion.

While the headline index softened, several underlying components suggest a more resilient picture. The business activity index, a key measure of economic activity, declined to 55.4 from 57.7, and the new orders index, a forward-looking indicator, fell to 55.1 from 57.3. Despite these declines, both indices remain comfortably above 50, indicating sustained expansion. Fourteen of the eighteen major service industries reported growth in June, underscoring the broad-based nature of this expansion.

A notable highlight of the report is the improvement in the employment index, which rose to 51.2 from 47.9. This marks the first time since February that the employment component has moved into expansionary territory, suggesting renewed hiring efforts by service companies. This uptick in employment is a welcome development for a sector that has faced challenges with consistent hiring over the past year. The supplier deliveries index also eased to 54.4 from 55.2, likely reflecting improved supply chain conditions as concerns related to Middle East disruptions abate.

Inflationary pressures, while still present, showed signs of moderating. The prices paid index decreased to 67.7 in June from a 45-month high of 71.3 in May. Although this figure remains elevated, it is significantly lower than the peaks observed during the COVID-19 related supply-chain disruptions. The ongoing conflict in Iran is anticipated to influence input prices in the near term; however, analysts will continue to monitor the M2 money supply¹ for indications of longer-term inflationary trends.

Key terms

1. ISM Non-Manufacturing Index: A monthly economic indicator that measures the health and activity levels of the U.S. services sector. A reading above 50 generally indicates economic expansion, while a reading below 50 suggests contraction.

2. Business Activity Index: A sub-component of the ISM Non-Manufacturing Index that tracks the change in the level of production or activity within the services sector.

3. M2 Money Supply: A broad measure of the amount of money in circulation, including cash, checking deposits, savings deposits, and money market accounts. Its growth or contraction can provide insights into potential future inflation or ongoing inflationary pressures.