The U.S. services sector expanded at a slower pace in June, as businesses continued to deal with inflation pressures linked to the Iran war.
The Institute for Supply Management’s non-manufacturing purchasing managers’ index fell to 54.0 last month. That was slightly below May’s reading of 54.5 and also under economists’ expectations of 54.2.
A reading above 50 signals expansion.
Services Remain Key to U.S. Economic Growth
The services sector plays a major role in the U.S. economy. It accounts for more than two-thirds of overall U.S. growth, making it one of the most important drivers of economic activity.
According to Reuters, many companies appeared to bring forward orders in May. This was likely done to protect themselves from possible price increases caused by an energy shock related to the Iran war.
New Orders Lose Momentum
That earlier boost now appears to be fading.
The ISM index tracking new orders in the services sector dropped to 55.1 in June, down from 57.3 in May. However, order backlogs increased, suggesting that demand has not disappeared completely.
Oil Prices Ease After U.S.-Iran Peace Deal
June also brought the signing of an interim peace deal between the U.S. and Iran. This helped push oil prices back toward pre-war levels.
As energy prices cooled, inflation concerns also eased.
This was reflected in the ISM’s prices-paid index, which fell to 67.6 in June from 71.3 in May. Even so, the reading remains high. Some economists warn that the inflation impact from the earlier oil price surge may still take time to move through the wider economy.
At the same time, large investments in artificial intelligence are also adding price pressure in areas such as chips and electronics.
Fed Rate Expectations Remain in Focus
Investors are watching inflation expectations closely. These could influence how the Federal Reserve handles interest rates during the rest of the year.
Signs of cooling inflation, combined with weaker-than-expected payroll data last week, led many traders to reduce bets on an immediate Fed rate hike. However, markets still expect at least one rate increase before the end of the year.
Higher interest rates can help slow inflation. But they can also put pressure on hiring, consumer demand, and the broader economy.
Services Employment Improves
The labor market picture remains mixed.
Some economists now see employers as being cautious. Many companies are neither aggressively hiring nor cutting workers.
The ISM’s services employment gauge rose to 51.2 in June, up from 47.9 in May. This suggests that employment in the sector returned to expansion after contracting in the previous month.
