Source: Economics Group of Wells Fargo Bank, N.A.
Summary
The ISM services index slipped into contraction for the second time in three months, sparking concern for service-sector resilience. But the outturn may overstate current weakness as the details are more consistent with a moderating rather than contracting sector.
Stalling More Than Sinking
The services-side of the economy may be starting to lose its footing. The ISM Services Index slipped 5.0 points to a contractionary reading of 48.8 in June (chart). This marks the second time in three months that the index is flashing signs of contraction and makes the April reading below 50 look less like an outlier. On a three-month average basis, the ISM Services Index now sits on the cusp of contraction (chart).
The drivers of weakness were also broad and are somewhat concerning. The Business Activity Index, a measure of current conditions, plunged nearly 12 points. While this likely in part reflects payback from a reading north of 60 in May, the below 50 (49.6) index value for June isn’t a great development. New orders also slipped into contraction territory for the first time in a year and a half. That said, for the second straight month 10 of 18 industries reported an increase in new orders while three reported a decrease, though the industry mix shifted. The drop in the index reflects a smaller share of respondents reporting higher orders, while a larger share reported the same or lower order activity.
The mood music is changing, but we expect the overall ISM overstates current weakness. The select respondent comments in the release struck a tone of caution and generally mentioned slower or softer activity relative to a month or year ago, but there is little indication the tide is turning fast.