WASHINGTON, July 6 - Activity in the U.S. services sector moderated in June as some of the earlier rush to place orders subsided, yet employment within the sector returned to growth after three months of contraction. The Institute for Supply Management reported on Monday that its nonmanufacturing purchasing managers index fell to 54.0 in June from 54.5 in May. Readings above 50 indicate expansion in the services sector, which represents more than two-thirds of U.S. economic output.
The ISM survey showed that new orders for services firms declined to 55.1 in June, down from a surge to 57.3 in May. Despite the decline in incoming orders, firms reported that order backlogs increased over the month, indicating a divergence between fresh demand and accumulated work.
A similar pattern - a waning of recent order flows alongside rising backlogs - appeared in the ISM's manufacturing survey the prior week.
Inflation and commodity dynamics
The four-month U.S.-Israeli conflict with Iran had earlier pushed up commodity prices, including oil. With Washington and Tehran reaching a ceasefire and a fragile truce last month, oil prices eased back toward pre-war levels. The fall in oil costs contributed to a slowdown in the pace of services inflation.
The ISM's gauge of prices paid by services businesses retreated to 67.7 in June from 71.3 in May, remaining elevated but showing a clear deceleration. Economists have cautioned that underlying inflationary pressures could persist even with lower oil prices. Firms' investments in artificial intelligence have been driving up costs for goods such as semiconductors and electronics, supporting price pressures in certain categories.
Supply chains and delivery times
Suppliers continued to take longer to deliver inputs to services companies in June. The survey's supplier deliveries metric eased slightly to 54.4 from 55.2 in May. Because readings above 50 correspond to slower deliveries, the elevated level indicates protracted lead times. While longer delivery times are often associated with stronger demand, in this instance the survey cautioned that strained supply chains do not necessarily reflect robust underlying demand.
Growth, labor and central bank expectations
The Atlanta Federal Reserve's model is estimating that gross domestic product increased at a 1.2% annualized rate in the second quarter, a projection that in part reflects what has so far appeared to be a wider goods trade deficit. By comparison, the economy expanded at a 2.1% annualized rate in the January-March quarter, although consumer spending in that period nearly stalled.
Most economists continued to expect the Federal Reserve would raise interest rates this year, even as job growth slowed considerably in June and revisions showed that nonfarm payroll gains in the prior two months were not as strong as earlier reported. The ISM survey, however, reinforced the view among some economists that the labor market remains in a "low hire, low fire" state.
Within the ISM report, the services sector employment index climbed back into expansion at 51.2 in June, up from 47.9 in May. Last month the U.S. central bank left its benchmark overnight interest rate in the 3.50%-3.75% range, but updated quarterly projections signaled that policymakers still expected to lift borrowing costs over the course of the year.
The June ISM nonmanufacturing report portrays a services sector that is still expanding but cooling in momentum as order flows ease and supply-chain frictions persist. At the same time, the return of employment growth suggests continued resilience in labor markets even amid slower headline growth and ongoing policy uncertainty.