US service activity nearly stagnates as employment contracts
Business activity has expanded but at a slower pace than in June
[WASHINGTON] The US services sector effectively stagnated in July as firms, faced with tepid demand and rising costs, reduced headcount.
The Institute for Supply Management’s (ISM) index of services declined last month to 50.1, below all estimates in a Bloomberg survey of economists. Readings above 50 indicate expansion.
The employment index dropped to 46.4, contracting for the fourth time in five months and marking one of the lowest readings since the pandemic. The group’s measure of prices paid for materials and services, meanwhile, climbed to the highest since October 2022.
The data, released on Tuesday (Aug 5), paint a picture of a sluggish service economy wrestling with the fallout of higher tariffs, cautious consumers and uncertainty stemming from US President Donald Trump’s policies.
Business activity expanded but at a slower pace than in June. The new orders index fell to 50.3, nearing stagnation.
“Continued expansion of activity in new orders index together with a slight improvement in the backlog of orders index highlight the resilience of the US services sector,” Steve Miller, chair of the ISM Services Business Survey Committee, said on a conference call. “No question, however, the tariffs are raising prices-paid, a potential driver of future inflation.”
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Eleven service industries reported growth in July, including transportation, wholesale trade and finance. Seven industries contracted, led by accommodation and food services.
The services sector is by far the largest in the US economy, and has helped drive growth this year while the manufacturing industry contracted for five straight months.
But the latest report aligns with an economy that’s flashing warning signs. Data out last week showed a much weaker labour market previously thought after revisions to May and June, and inflation-adjusted consumer spending barely rose.
The ISM services employment gauge has now contracted for two straight months, and four times over the past five months.
The contraction in the employment index does not appear to be coming from layoffs but from a slowdown in hiring activity and providers not backfilling open positions, Miller said.
The Bureau of Labor Statistics’ downward revision of its May and June jobs numbers make more sense given the ISM employment results, Miller also said. “Our contraction readings in June and July indicate that the BLS numbers will continue to be weak through the rest of the summer,” he said.
Backlogs shrank for a fifth-straight month, and inventories expanded at a slower pace. ISM’s index of inventory sentiment fell nearly four points to 53.2, the lowest since October.
Separate data out on Tuesday showed the US trade deficit narrowed in June to the tightest since September 2023 as companies scaled back on imports after a massive surge earlier in the year. BLOOMBERG
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