U.S. Service Industries Expand at Slower Pace Than Expected

(Bloomberg) -- U.S. service providers expanded in June by less than forecast as a measure of employment contracted, reflecting employers' struggle to attract workers in industries like hotels and restaurants.

The Institute for Supply Management's services index fell to 60.1 last month from a record 64 in May. Readings above 50 indicate expansion. Orders and business activity also settled back. The June figure compared with the 63.5 median projection in a Bloomberg survey of economists.

While cooling from a month earlier, the report shows still-solid demand for services like restaurant dining, hotel stays and travel. The ISM's measure of order backlogs was the highest in the group's data back to 1997.

At the same time, an index of services employment dropped to the lowest level this year, slumping to 49.3 from 55.3 a month earlier. The June figure mirrored a similar result from the ISM's survey of manufacturers, which also showed employment contracted.

“The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month's all-time high,” Anthony Nieves, chair of the ISM's Services Business Survey Committee, said in a statement. “Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions.”

Stocks extended losses following the report as the yield on 10-year Treasuries declined.

Sixteen of 18 service industries reported growth in June, led by arts, entertainment and recreation. Real estate and agriculture reported decreases.

Select ISM Industry Comments
“Our restaurants are quickly — maybe too quickly — returning to 2019 sales levels... Some locations cannot open for business or [have] limited hours, as we cannot staff the restaurant to meet consumer demand.” - Accommodation & Food Services
“COVID-19 continues to cause troubles for all of our deliveries, as well as short supply a lot of materials. [Shortages of] lumber, copper, and steel continue, which is driving up pricing and lead times.” - Construction
“... We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market.” - Retail Trade
“Labor market remains tight, and wages have risen at an unprecedented rate. We are expecting a long-term effect on pricing of services.” - Transportation & Warehousing
“We are seeing increased orders and slight improvements in backlogs. The primary headwinds this month continue to be very expensive ocean freight rates, increasing business costs and increasing raw-materials costs. The top line is not outrunning expenses.” - Wholesale Trade

The services index of inventories also shrank, indicating that supply chain constraints continue to hold back economic activity. Supplier delivery times remain elevated due to truck availability, slower rail services, port congestion and container shortages, Nieves said on a call with reporters.

A separate gauge of inventory sentiment dropped to a record low, showing more service providers see their stockpiles as too lean. The index of prices paid for materials fell slightly, suggesting that while still elevated, the acceleration in cost pressures may be starting to cool.