U.S. Services Gauge Drops to Lowest Since 2017

(Bloomberg) -- A gauge of U.S. service industries dropped more than forecast in June to the weakest in almost two years, led by a cooling in employment that may further temper optimism about the labor market heading into Friday's jobs report.

The non-manufacturing index fell to 55.1 from 56.9, according to an Institute for Supply Management survey Wednesday. Three of the gauge's four components slipped, with employment dropping by the most in 16 months and new orders declining to the lowest level since December 2017. Sixteen of 18 industries reported growth in June, unchanged from the prior month.

Key Insights

• The report is likely to reinforce expectations that the Federal Reserve will cut interest rates at its next meeting later this month, though the central bank will be placing greater emphasis on the jobs report. The Labor Department is projected to say job growth picked up by more than 160,000 positions last month after a weak 75,000 gain in May.
• ISM's employment gauge slipped 3.1 points to 55, holding above the dividing line of 50 between growth and contraction. A private report earlier Wednesday showed hiring at U.S. companies was weaker than expected in June, while Labor said that jobless claims fell for a second time in three weeks.
• The main ISM services reading matched the lowest level since October 2016, weighed down by sluggish global economies and President Donald Trump's trade war with China. The U.S. and Beijing declared a truce Saturday. ISM sends members its survey in the first part of each month, with most respondents submitting answers later in the period.
• The report indicated no change in the group's trade measures, with a gauge of new export orders unchanged at 55 and an index of imports holding at 50.
• A separate report this week showed ISM'S factory index fell to 51.7, the third straight decline and the weakest level since October 2016. Manufacturing employment strengthened.

Official's View

“Although the non-manufacturing sector's growth rate dipped in June, the sector continues to reflect strength,” Anthony Nieves, chairman of the non-manufacturing survey, said in a statement. “Comments from the respondents reflect mixed sentiment about business conditions and the overall economy. A degree of uncertainty exists due to trade and tariffs.”

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• The main services index missed most forecasts in a Bloomberg survey of economists that had called for a decrease to 56.
• The remaining services components showed supplier deliveries rebounded from a three-year low, while business activity cooled.
• The prices gauge climbed to 58.9, the highest since January and a potential sign that U.S. inflation may be starting to stabilize.
• The backorders index climbed to a three-month high of 56, while the inventories gauge rose to 55, the highest since November. A measure of inventory sentiment held at 58.5.

--With assistance from Chris Middleton.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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