MNI INTERVIEW: ISM Choppiness Not A Clear Signal For Worry

Activity in the U.S. service sector declined sharply in June but it is too early to tell whether this augurs further weakening in the sector's outlook later this year, Institute for Supply Management chair Steve Miller told MNI Wednesday.

The ISM services composite gauge plunged 5.0 percentage points to 48.8 in June, well below consensus expectations for 52.5, and the lowest since May 2020. The deterioration was driven by a slide in the new orders index and lower business activity. The services sector has been in contraction territory for two of the last three months.

Miller said the report contains worrying signs that weakness among industries has broadened but it is too early to tell whether it heralds further deterioration in the sector.

"Over the last four months, including this one, we saw positive, negative, positive, negative. I don't think it's time to run to the fire exit," said Miller, who in June assumed the role of chair. "We should be watchful to see how it shakes out during the summer, given that there's been positive and negative signals over the last several months."

SERVICES GROWTH FLAT

The business activity index dropped noticeably and is below its neutral threshold of 50, cratering 11.6 percentage points to 49.6 and indicating contraction for the first time since May 2020. The decline in employment (-1.0 to 46.1) lends a little downside risk and Miller noted there has been an increase in firms shedding headcount.

There was a "pretty significant" drop in the news orders sub index, down 6.8 percentage points to 47.3, the first contraction since December 2022. "That doesn't speak well for continued growth, with the backlog going down and business activity as well."

The composite ISM survey has broadly trended lower since mid-2022, said Miller, noting volatility in the measure. "Although it is a slowdown, the number is 48.8 and pretty close to 50," he said, expressing optimism. He noted the headline PMI has broadly stayed in a 2.5ppts range centered just above 50.

Miller, however, suggested some reason for worry. "It seems like the slowness is though translating into additional industries which for me is cause for concern." The weakest industry in the ISM services survey was real estate. The ISM manufacturing and services measures were both in contraction in June. (See: MNI INTERVIEW: Rising Risk Of Sharper US Factory Slowdown - ISM)

Services survey respondents commented on stable sales and no significant changes in pricing or availability of services, he said. "It didn't seem like a fire alarm going off. It seemed like a flattening."

The prices sub index in June fell 1.8 percentage points to 56.3, the lowest since March. Miller said very few ISM survey respondents commented on the Federal Reserve or interest rates.