Service sector

US service sector index at 2-year low, employment contracts – ISM survey

A tractor-trailer advertising job opportunities in the trucking industry heads south on Interstate 81 near Staunton, Virginia, U.S., January 22, 2022. REUTERS/Evelyn Hockstein

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WASHINGTON, July 6 (Reuters) – The U.S. services industry slowed less than expected in June, but a measure of services employment fell to its lowest level in two years, suggesting that demand for labor labor could decline as the Federal Reserve’s aggressive monetary policy wears off. the economy facing a recession.

The Institute for Supply Management said on Wednesday its non-manufacturing activity index slipped to 55.3 last month from 55.9 in May. The third straight monthly decline pushed the index to its lowest level since May 2020, when the economy was battling the initial wave of the COVID-19 pandemic.

Economists polled by Reuters had forecast the non-manufacturing index falling to 54.3. A value above 50 indicates an expansion of the service sector, which accounts for more than two-thirds of US economic activity.

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The sector is supported by a rotation of expenditure towards services from goods. The moderation in growth is in line with recent data showing that rising interest rates are dampening demand. Consumer spending edged up in May, while housing starts, building permits and factory output fell.

The ISM reported last Friday that its national factory activity index hit a two-year low in June.

Last month, the Fed raised its key rate by three-quarters of a percentage point, its biggest hike since 1994, to curb inflation. Another similar rate hike is expected in July. The US central bank has raised its benchmark overnight interest rate by 150 basis points since March, leaving the economy on recession watch.

Gross domestic product has already contracted in the first quarter, and the recent round of soft data has left some economists anticipating that output fell further in the last quarter. But another decline in GDP would not necessarily indicate a recession unless the economy suffered heavy job losses.

The ISM measure of new orders received by service businesses fell to a still-high 55.6 last month from 57.6 in May. Companies reported an increase in order books, while exports continued to grow.

But its service industry employment gauge fell to 47.4, the lowest reading since July 2020, from 50.2 in May. This is the third time this year that the index has fallen below 50. June’s drop could either be a sign of slowing labor demand or a continuing labor shortage ‘work. The ISM factory employment indicator also fell into recessionary territory in June.

On the face of it, that doesn’t bode well for the Labor Department’s jobs report for June, due Friday. But job growth remained solid in the months when ISM employment measures contracted. There were 11.4 million job openings at the end of April.

The ISM survey’s supplier shipments measure edged up to 61.9 from 61.3 in May. Although services inflation has continued to rise, there are signs that it has probably peaked. A measure of prices paid by service industries for inputs fell to 80.1, the lowest reading since September 2021, from 82.1 in May.

With demand for goods slowing, prices in the services sector are key in determining when inflation might start to decline.

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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama

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