MARKET TRENDS: Service Sector Slows; Hiring and Pricing Weakens

Survey reports from the Institute of Supply Management (ISM) and financial data provider Markit Ltd. on Monday indicated moderate growth in June. The manufacturing and service sector surveys a exhibiting a distinct slowdown of economic expansion since the start of the second quarter, when business initially picked up after the dissipating impact of harsh winter weather. This could slow down the GDP growth again in the third quarter.

U.S. service sector activities grew slightly slower than expected in June. The ISM Non-Manufacturing Purchasing Manager’s Index (PMI), an indicator of the level of business activities in the service sector, reached 56.0 in June but missed market expectations of 56.2. In May, the Index of 55.7 was the weakest since April 2014, and was also below estimates of 57.

The slower growth in the Headline Index was led by a 2.6 points slide in the employment component to 55.3 in June, up from 52.7 in May, and a 2.9 points decline in the Prices Index to 53.0 from 52.7 in May. The Employment Index weakened despite last week’s Labor Department report on private service companies accounting for the bulk of the 223,000 new jobs added in June.

Export orders fell for the second month to 52.0 from 55.0. However, production gained pace as reflected by the Non-Manufacturing Business Activity Index, which surged 2 points to 61.5 in June from 59.5 in the previous month. The New Orders Index registered 58.3, 0.4 points higher than the reading of 57.9 in May. Despite slow progress, the indices were above 50, indicating expansion.

According to the report, 15 non-manufacturing industries reported growth in June. The majority of respondents’ comments are positive about business conditions and the economy.

Earlier on Monday, Markit stated its service-sector composite index, which covers both manufacturing and services, came in at 54.6 in June, down from 56.0 in May – the lowest reading since January.

A slower growth in output and employment at the end of the second quarter led to the dip in the Headline Index. The agency’s Services PMI of 54.8 in June was slightly below the market expectations of 54.9, and lower than 56.2 in May. It was still above the 50.0 threshold for the twentieth successive month.

In June, job creations as per Markit eased to a three-month low, while input cost inflation reached its highest level since October 2013. The higher food prices led to a rise in costs. Business activity expectations for the year ahead were moderate in June.

Market sentiments turned negative after the data releases, and the stock market was lower after the open. The U.S. dollar index dropped to 96.57 from 96.64 ahead of the report.

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