ISM survey shows US service sector up in June; inflation gradually slowing

THE US services sector grew faster than expected in June as new orders picked up, but a measure of prices paid by businesses for inputs fell to more than a three-year low, suggesting that the closely watched services inflation would continue to cool.

The Institute for Supply Management (ISM) said on Thursday that its non-manufacturing PMI increased to 53.9 last month from 50.3 in May. A reading above 50 indicates growth in the services industry, which accounts for more than two-thirds of the economy. Economists polled by Reuters had forecast the non-manufacturing PMI rising to 51.0.

The survey is among several indicators, including housing starts, nonfarm payrolls and orders for long-lasting manufactured goods, that have suggested the economy continues to plod along despite growing risks sparked by hefty interest rate increases from the Federal Reserve.

Higher borrowing costs have battered manufacturing, with the ISM reporting last week that its manufacturing PMI remained stuck below the 50 threshold in June for the eighth straight month, the longest such stretch since the Great Recession.

The Fed has hiked its policy rate by 500 basis points since March 2022, when it embarked on its fastest monetary policy tightening campaign in more than 40 years.

With the labour market still tight and inflation elevated, the US central bank is expected to resume raising rates this month after skipping in June.

A measure of new orders received by services businesses rose to 55.5 last month from 52.9 in May. There was a solid increase in exports. Despite the pickup in demand, services inflation continued to moderate, which bodes well for the Fed’s efforts to bring inflation down to its 2 per cent target.

The services sector is at the centre of the battle against inflation, as services prices tend to be stickier and less responsive to rate hikes. A gauge of prices paid by services businesses for inputs fell to 54.1, the lowest level since March 2020, from 56.2 in May.

Some economists view the ISM services prices paid measure as a good predictor of personal consumption expenditures (PCE) inflation. The Fed tracks the PCE price indexes for monetary policy. The annual PCE price index excluding food and energy increased 4.6 per cent in May after advancing 4.7 per cent in April.

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Services sector employment rebounded in June, underpinning expectations for another month of solid job growth.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 225,000 jobs in June after rising 339,000 in May. The government is scheduled to release its closely watched employment report for June on Friday. REUTERS