The Services ISM Plunges Into a Recession Forecasting Contraction

The ISM Services report was a disaster. Based on the current report, the overall economy dipped into contraction.

Please consider the Please consider the June 2024 Services ISM^® Report On Business^® emphasis mine.

The report was issued today by Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management^® (ISM^®) Services Business Survey Committee: “In June, the Services PMI^® registered 48.8 percent, 5 percentage points lower than May’s figure of 53.8 percent. The reading in June was a reversal compared to May and the second in contraction territory in the last three months. Before April, the services sector grew for 15 straight months following a composite index reading of 49 percent in December 2022; the last contraction before that was in May 2020 (45.4 percent). The Business Activity Index registered 49.6 percent in June, which is 11.6 percentage points lower than the 61.2 percent recorded in May and the first month of contraction since May 2020. The New Orders Index contracted in June for the first time since December 2022; the figure of 47.3 percent is 6.8 percentage points lower than the May reading of 54.1 percent. The Employment Index contracted for the sixth time in seven months and at a faster rate in June; the reading of 46.1 percent is a 1-percentage point decrease compared to the 47.1 percent recorded in May.

Miller continues, “The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020 and continued contraction in employment. Survey respondents report that in general, business is flat or lower, and although inflation is easing, some commodities have significantly higher costs. Panelists indicate that slower supplier delivery performance is due primarily to transportation challenges, not increases in demand.”

Respondent Comments

1. “Sales and traffic remain soft compared to last year. High gas prices in California and constant news about inflation and restaurant menu prices are culprits.” [Accommodation & Food Services]
2. “Costs seem to have stabilized but are still higher. The company is holding steady to see what the election will hold.” [Construction]
3. “Currently, our operations are normal, but we are experiencing slightly higher costs due to the increase in fuel. We are at the end of our fiscal year, when an increase in expenditures is typical.” [Educational Services]
4. “Steady, with no major shifts in pricing or availability of services.” [Finance & Insurance]
5. “Demand for services has moderated after near-record patient levels in the last month.” [Health Care & Social Assistance]
6. “We are still experiencing supply chain challenges with the increased cost of chemicals, as well as the domestic and overseas freight costs associated with them.” [Management of Companies & Support Services]
7. “Slightly higher prices across the board, but less pricing pressure for some items. Still long lead times for heavy equipment, fire apparatus, ambulances and the like.” [Public Administration]
8. “Inflation continues to be a general concern for both purchasers and sellers. For example, with inflation continuing, will customers have enough discretionary funds to spend?” [Retail Trade]
9. “Supply issues have calmed down. Prices on many products remain high, with no sign of decreases.” [Utilities]
10. “Market seems to be slowing in June. This is complicated by increased ocean freight rates and tight container bookings.” [Wholesale Trade]

Stagflationary Comments

For 85 consecutive months, prices have increased.

Eight of ten respondent comments complained of prices.

This reeks of stagflation.

Unexpected Report

The Bloomberg Economists Consensus was a reading of 53.0 in a range of 52.0 to 55.5.

The actual report was 3.2 percentage points below the lowest economist’s estimate.

ISM Manufacturing New Orders and Backlogs in Steep Contraction

On June 3, I reported ISM Manufacturing New Orders and Backlogs in Steep Contraction

The Manufacturing ISM was in contraction for 16 months went positive for a month and is contracting again for two months with order backlogs falling for 20 months.

Services have joined the party with a stagflationary looking report.

As always, it is not the data that matter but what the model forecast.

However, I highly doubt the model expected the two terrible reports today and a third bad one.

The other terrible report was factory orders and the bad one was international trade. I will comment shortly.