The numbers: An ISM barometer of business conditions at service-oriented companies such as restaurants, hotels and retailers dipped to a two-year low of 55.3% in June — yet another sign of a slowing U.S. economy.
Economists polled by The Wall Street Journal had forecast a reading of 54%. The index registered 55.9% in May.
While numbers over 50% are viewed as positive for the economy, the index has fallen three months in a row. A similar ISM survey of American manufacturers also showed business slowing to a two-year low in June.
Big picture: The economy is decelerating because of high inflation, as the ISM surveys found.
“Inflation is definitely taking a bite from our sales,” a retail executive told the Institute for Supply management.
The Federal Reserve is trying to tame the surge in prices by raising interest rates. A higher cost of borrowing usually slows the economy by making it more expensive to buy a house or a car or take out a business loan.
The more aggressive Fed strategy has also raised worries the central bank could drive the economy into recession. But for now, both ISM surveys indicate demand is still fairly strong and the economy is fairly stable.
Key details:
- The new orders index dropped 2 points to 55.6%, a 16-month low.
- The production gauge rose 1.6 points to 56.1%, but it’s more backward-looking.
- The employment barometer fell 2.8 points to 47.4%, the third negative reading in the past five months. It was also the lowest reading in almost two years.
- The prices-paid index, a measure of inflation, declined for the third month in a row to 82.2% from 85.6%.
“Growth might not be as strong as in the past, but the demand is still there,” said Anthony Nieves, chairman of the survey.
He said the drop in the employment index mostly reflected a tight labor market in which companies can’t find enough people to fill open positions or replace workers who left. Nieves said there have been some “isolated” layoffs, however.
The slowdown in orders is causing inflation to ease, Nieves said, but he stressed that price pressures remained high because of ongoing shortages of supplies.
““The shutdowns in China due to the zero-Covid policy have adversely impacted our supply chain,” one senior executive told ISM.
Looking ahead: “The relative resilience of the ISM services index in June should help to dampen speculation that the economy is at risk of imminent recession,” said U.S. economist Michael Pearce of Capital Economics.
“The surveys paint a consistent picture of an economy expanding at a below-trend pace, rather than one on the brink of a recession.”
Market reaction: The Dow Jones Industrial Average DJIA, +0.02% and S&P 500 SPX, +0.04% rose slightly in Wednesday trades.
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