June Services PMI shows more growth but at a slightly reduced rate

June services economy remained at similar levels compared to May, with some variation, according to the most recent edition of the of the Services ISM Report on Business, which was issued today by the Institute for Supply Management (ISM).

The Services PMI came in at 55.3 (a reading of 50 or higher signals growth), down 0.6% compared to May, following a 1.2% decrease, from April to May. The Services PMI showed growth, at a slower rate, for the 25th consecutive month, with services sector growth now remaining intact for 147 of the last 149 months through June, said ISM.

The June Services PMI is 5.5% below the 12-month average of 60.8, with November 2021’s 68.4 and June’s 55.3 marking the high and low readings over that period, respectively. What’s more, the June reading represents the lowest one since February 2021, which came in at 55.9.

ISM reported that 14 of the services sectors it tracks saw gains in June, including: Mining; Management of Companies & Support Services; Other Services; Construction; Arts, Entertainment & Recreation; Utilities; Public Administration; Wholesale Trade; Health Care & Social Assistance; Professional, Scientific & Technical Services; Transportation & Warehousing; Accommodation & Food Services; Retail Trade; Finance & Insurance; Agriculture, Forestry, Fishing & Hunting; Information; Real Estate, Rental & Leasing; and Educational Services. ISM noted that no service sectors saw declines in June.

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

-Business activity/production, at 56.1, rose 1.6%, growing, at a faster rate, for the 25th consecutive month, with 15 services sectors reporting growth;
-New orders, at 55.6, fell 2.0%, growing, at a slower rate, for the 25th consecutive month, with 13 services sectors reporting growth;
-Employment, at 47.4, fell 2.8%, falling back into contraction territory, after a 0.7% May gain, contracting in April a 5.5% March gain, which was preceded by seven straight months of growth, with seven services sectors reporting growth; and
-Supplier deliveries, at 61.9 (a reading above 50 percent indicates slower deliveries), up 0.6 over May and slowing, at a faster rate, for the 37th consecutive month

Comments from ISM member respondents included in the report highlighted various issues being seen in the services sector, including: supply chain, employment, and inflation, among others.

“Supply chain and supplier reliability continues to improve for most of our key food and packaging needs,” said an Accommodation & Food Services respondent. “Equipment still (experiencing) typical long delays. Staffing employment challenges have resurfaced, and costs have dramatically increased on core needs, led by soybean oil products. Rise in diesel fuel affecting almost everything.”

A Utilities respondent said that despite higher inflation and energy costs, demand and business activity continue to be at record highs, with little sign of a slowdown.

Tony Nieves, Chair of ISM’s Management Services Business Survey Committee, explained in an interview that declines in the Services PMI, from March through June, serve as a barometer of how much pent-up demand there was from consumers, for services economy activities, out of 2021 and the first half of 2022.

“Things were continually opening up over that period,” he said. “The thing we are experiencing right now is that we are getting a little bit of a decline in consumer confidence, with inflation, issues we are having with materials shortages, some pullback in real estate and rental prices coming down a little bit. Hopefully, fuel prices will come down more, too. But because of the inflation eating into consumer spending…people are spending money on other things. It is not necessarily tangible goods like it was in the past, but more so they are dining out still and spending money on experiences. It is not all gloom and doom.”

While talk of an impending economic recession remains, Nieves said that the contraction of the GDP, down 1.2% for the second quarter, indicates that while the economy may already be in a technical recession, there has never been a recession in which the unemployment rate has been as low as it currently is.

With the ISM report’s employment reading currently on an uneven path, Nieves said that the key cannot hire.

“There have been some layoffs in the tech space and some other areas, but, for the most part, the majority of [ISM member] respondents have been telling us they cannot find people and there is a restricted labor pool, or else that employment number would be in positive territory,” he said. “Many industries simply cannot get the people they need. Companies are hiring people that are not of the quality or caliber of the people they want. That was a finding in our Semiannual Forecast.”

Looking at the impact of prices on the services sector, Nieves said he expects that number to come down in the coming months, for various reasons.

“One reason is that materials prices are coming down, for certain metals, as is fuel somewhat,” he said. “The pricing power will not be there, because consumer pricing is going down. “I think all these factors will take that pricing down. Where that goes to, I have no idea, but I think we have pretty much peaked on this inflation piece. This was all demand-pull inflation to start with, so when demand is going away, or still there, there are certain areas, where it is not as significant as it was in the past.”

In assessing the services economy on a year-to-date basis, Nieves said 2023 started out very strong, with some leveling-off now occurring, in the form of more incremental growth, which he expects to continue over the balance of the year. As for 2023’s prospects, he said it is still too early to tell.

“If we can weather some of the potential headwinds for the balance of the year and, hopefully, we have a good holiday season, it can maybe carry over into a good 2023,” he said. “A lot of that has to do with not just whether or not we avoid a recession, or even if we do go into a recession, that it is a mild one and that we don’t have any more geopolitical ramifications like the Russia-Ukraine war. It has caused more disruptions in Europe than here, but it is still a disruption.”