ISM Services PMI falls from May to June but remains strong

Following its best month on record in May, services economy activity remained strong in June, according to the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The reading for the report’s key indicator—the Services PMI (formerly the Non-Manufacturing PMI)—at 60.1 (a reading of 50 or higher indicates growth is occurring)—slipped 3.9% from May’s 64 reading, with the index growing, at a slower rate, for the 13th consecutive month, with economic growth in the services sector also growing for the 13th month in a row, with services sector growth intact in 135 of the last 137 months.

The June Services PMI reading is up 1.2% compared to the 12-month average of 58.9, with the high for that period being May’s 64, and the lowest for that period being February’s 55.3.

ISM reported that 16 of the 18 sectors it tracks saw gains in June, including: Arts, Entertainment & Recreation; Other Services; Transportation & Warehousing; Wholesale Trade; Retail Trade; Management of Companies & Support Services; Accommodation & Food Services; Utilities; Mining; Construction; Health Care & Social Assistance; Public Administration; Information; Finance & Insurance; Educational Services; and Professional, Scientific & Technical Services. The two industries that reported a decrease in the month of June are Real Estate, Rental & Leasing; and Agriculture, Forestry, Fishing & Hunting.

The report’s equally weighted subindexes that directly factor into the NMI were mostly up in June, including:

-business activity/production decreased 5.8%, to 60.4, growing, at a slower rate, for the 13th month in a row, with 16 service sectors reporting growth; 
-new orders fell 1.8% increase, to 62.1, growing, at a slower rate, for the 13th month in a row, with 16 service sectors reporting growth;
-employment fell 6%, to 49.3, contracting after five straight months of growth, with 12 services sectors reporting growth; and
-supplier deliveries, at 68.5 (a reading of 50 or higher indicates contraction), slowing, at a slower rate, for the 25th consecutive month

Comments in the report submitted by ISM member respondents provided an overview of different factors at play in the services sector, including improving business conditions as more people receive the COVID-19 vaccine, cost increases and long lead times, and transportation and logistics-related issues.

“Our restaurants are quickly—maybe too quickly—returning to 2019 sales levels,” said an Accommodation & Food Services respondent. “Strong consumer demand for dining out is clearly evident as COVID-19 restrictions ease, but the challenges are supply chain outages, logistics delays and employee- and management-staffing constraints. Some locations cannot open for business or (have) limited hours, as we cannot staff the restaurant to meet consumer demand.”

An Arts, Entertainment & Recreation respondent observed that severe supply chain disruptions and inflation are continuing in the marketplace, in all sectors.

Tony Nieves, chair of the ISM’s Services Business Survey Committee, said in an interview that while the services economy had another solid month, there are various impediments to business conditions, too.

“It is not the economy, as the economy is strong right now,” he said. “It is just that there have been some impediments, whether it is a supply and demand shift, materials shortages, inflation, logistical challenges, weather issues, port congestion, a lack of available drivers, and other things. Again, the economy is still going strong, and, quite frankly, were it any stronger of a major [downward shift] down the road.”

He also pointed to the ongoing struggles with employment, as the services sector workforce still remains short of full capacity, or restricted, due to a lack of resources.

Looking ahead, Nieves said a watchful eye needs to be kept on inflation, as there is not enough capacity to handle increased demand, which has led to surges in backlog, deliveries, and depleted inventories, among other things.

“There is a combination of supply and demand impacting pricing, as well as certain supplier providers taking advantage of the situation and getting the pricing power they want,” he said. “An eye needs to be kept on that, and an eye needs to be kept on not running into an economic standstill down the road, due to inflation, as things start to level off. It will all depend on demand but will not stay at this level.”