ISM SERVICES KEY POINTS:
- June ISM services falls to 55.3 from 55.9 in May, easing less than expected by Wall Street analysts
- The services sector slows less than expected, suggesting the economy may be able to avoid a recession in the near-term
- Better-than-expected data may help improve market sentiment
A measure of U.S. business services activity grew for the 25th consecutive month in June, but continued to deccelerate at the tail end of the second quarter, a sign that the economy is cooling amid mounting headwinds, including sky-high CPI readings, softening demand and tightening financial conditions.
According to the Institute for Supply Management, its PMI non-manufacturing dropped to 55.3 last month from 55.9 in May, remaining above the 50 level that separates growth from contraction, but posting the weakest expansion since May 2020. The median forecast in a Bloomberg News poll called for a larger decline decline to 54.00 in the headline index.
Looking at the performance of some of the components, production rose modestly to 56.1 from 54.5, but new orders retreated, falling to 55.6 from 57.6. Meanwhile, the employment indicator extended its decline, dropping to 47.4 from 50.2, a bad omen for the labor market. Elsewhere, the prices paid index cooled to 80.1 from 82.1, signaling that input costs are easing, albeit at very slowly.
All in all, the slowdown in the services segment of the economy, where most Americans work and which accounts for roughly two-thirds of U.S. gross domestic product, is a clear indication that the recovery is weakening, but not at such an alarming rate as to suggest that the economy is about to fall off the cliff.
While consumer spending was expected to shift back to high-contact industries from goods expenditure, stubbornly high inflation will continue to reduce real income and squeeze household budgets, curtailing discretionary consumption. This situation will likely weigh on the services sector during the second half of 2022, raising the probability of a recession later in the year or perhaps in 2023.
Fears of a hard landing will prevent U.S. Treasury yields from staging a meaningful rebound following the correction seen in recent days, as recession risks appear to outweigh inflation concerns. In any case, growth should have a deleterious impact on the equity market, but cyclical stocks, whose fortunes are tied to healthy economic activity, may suffer the most.
The S&P 500 remained subdued following the release of the ISM survey, down about 0.10% to 3,833, despite the better-than-forecast headline print, as traders remaiend reluctant to take large directional positions ahead of the June FOMC minutes, which will be released this afternoon. The document could offer clues about the Fed’s tightening cycle and whether policymakers are seriously considering another 75 basis point hike at their July meeting.
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—Written by Diego Colman, Market Strategist for DailyFX