in Both Business Activity and New Orders

• The topline ISM Services PMI posted a result of 48.8 in June 2024, lowest post-pandemic reading to date. 

• The Business Activity component of the ISM Services PMI retreated sharply in June 2024, falling into contraction at 49.6.

• Employment posted a fifth consecutive contractionary month in June 2024 (46.1). 

• Services industry price pressures remained elevated in June 2024 at 56.3.

The ISM Services PMI report reflected contractionary conditions in June 2024 with a topline index reading of 48.8 for the month. This is the second result below the breakeven threshold of 50 for the index out of the past three months – an outcome not experienced since 2009 aside from pandemic-forced business closures in 2020. Business Activity and New Orders both sharply reversed course after a bounce in May, and the Employment component of the ISM Services PMI report continued to disappoint with a fifth consecutive contractionary result.

The ISM Services index measures net activity among service industry businesses, with a reading of 50 implying an even split between those indicating expansionary and contractionary conditions. The June 2024 result was the weakest since July 2009 (47.0), discounting the collapse induced by the pandemic in April and May of 2020 (41.6 and 45.4, respectively). Averaging out the volatility of the past four months’ ISM Services PMI reports, the topline metric is still barely above breakeven at 51.85. The services sector of the U.S. economy is clearly slowing.

Business Activity gave back May 2024’s surprising gain and then some, falling into contractionary territory at 49.6 for June. The sharp gain and immediate reversal in service providers’ Business Activity over the past two months suggests some timing issues with consumer demand, as the ISM Services report’s Inventories metric was stable in May before also falling sharply in June (42.9). Again averaging over the past few months’ volatility, the services sector’s Business Activity trend is nonetheless continuing the downward trend that began during the second half of 2023. The average Business Activity result from March through June of this year is 54.78, which compares with a 2023 mid-year peak of 59.2 (June 2023).

Service industry cost pressures have not let up despite weakening demand, according to the ISM Services PMI Prices component’s 56.3 reading for June 2024. Wage growth from Professional & Business Services industries through Leisure & Hospitality employers are outpacing total wage gains in the U.S. economy, and indeed have accelerated since the start of this year. This persistent stress on service providers’ balance sheets looks to hit bottom lines through the summer months as the ability of these businesses to pass costs onto inflation-weary consumers seems to have waned.

The June 2024 ISM Services PMI report perhaps undoes some of the alarm raised by the previous month’s surprise jump as the summer spending season kicked off. A slowdown in consumer demand is necessary for inflation to reach the Fed’s target of a sustainable average pace of 2%, and this is especially true for services spending which has dominated spending habits through much of the post-pandemic experience. After stalling in its downward trajectory earlier this year, inflation has shown signs of renewing its trend toward target over the past couple of months. Pressure from consumer demand presents the most significant risk to achieving that result given current spending preferences. But on average, the ISM Services reports for the second quarter of the year point toward a much-needed breather from services spending as the second half of the year progresses.