Services Activity Contracts at Fastest Pace in Four Years

The US services sector experienced its fastest contraction in four years in June, driven by a significant decline in business activity and new orders. The Institute for Supply Management (ISM) reported that its services index dropped 5 points to 48.8, indicating a contraction (below 50). This unexpected downturn, with the business activity index falling 11.6 points, reflects a substantial slowdown from the previous month when the measure hit a nine-month high. This shift suggests that the sector, which forms the largest part of the economy, is facing challenges due to high borrowing costs, reduced business investment, and fluctuating consumer spending.

This contraction contrasts sharply with the S&P Global’s services index, which showed an increase to 55.3, highlighting a faster rate of expansion. The ISM report also revealed that employment in the services sector shrank for the fifth consecutive month, and inventories contracted at the fastest pace since October 2021. Eight services industries, including real estate, mining, and retail trade, reported contractions in June, while another eight sectors reported growth. Despite easing inflation, businesses reported higher costs for some commodities. These mixed signals have led to a decrease in Treasury yields and an increase in stocks, as investors speculate on potential Federal Reserve interest rate cuts.

Our take (from the Straight to Smart newsletter):

Beware Inflations False Dawn

Article Excerpt:

The US services sector contracted in June at the fastest pace in four years due to a sharp pullback in business activity and declining orders.

The Institute for Supply Management’s composite gauge of services slumped 5 points to 48.8. Readings below 50 indicate contraction, and the June figure was far weaker than all forecasts in a Bloomberg survey of economists.

Click to read original Bloomberg article (subscription may be required):
US Services Activity Contracts at Fastest Pace in Four Years

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