US companies are growing at the slowest pace in two years, ISM shows, as the economy slows

The payment: An ISM barometer of business conditions at service-oriented businesses like restaurants, hotels and retailers fell to a two-year low of 55.3% in June – another sign of a slowdown in the US economy.

Economists polled by the Wall Street Journal had forecast a figure of 54%. The index returned 55.9% in May.

While figures above 50% are seen as positive for the economy, the index has fallen for three straight months. A similar ISM survey of US manufacturers also showed that business slowed to a two-year low in June.

Big picture: The economy is slowing due to high inflation, ISM surveys showed.

“Inflation is definitely affecting our sales,” a retail executive told the Institute for Supply Management.

The Federal Reserve is trying to curb the rise in prices by raising interest rates. Higher borrowing costs usually slow the economy by making it more expensive to buy a home or car, or to get business credit.

The more aggressive Fed strategy has also raised fears that the central bank could push the economy into recession. But for now, both ISM surveys show that demand is still pretty strong and the economy is pretty stable.

Key data:

  • The new orders index fell 2 points to 55.6%, a 16-month low.

  • The production gauge rose 1.6 points to 56.1% but is rather backward looking.

  • The employment barometer fell 2.8 points to 47.4%, the third negative reading in the past five months. It was also the lowest level in almost two years.

  • The index of prices paid, a measure of inflation, fell for the third straight month to 82.2% from 85.6%.

“Growth may not be as strong as it has been in the past, but demand is still there,” said Anthony Nieves, chair of the survey.

He said the decline in the employment index mainly reflected a tight labor market, with companies not finding enough workers to fill vacancies or replace workers who have left. Nieves said there have been some “isolated” layoffs, however.

The slowdown in orders is easing inflation, Nieves said, but stressed that pricing pressures remain high due to ongoing supply shortages.

“The closures in China due to the zero-Covid policy have had a negative impact on our supply chain,” a senior official told ISM.

Looking ahead: “The relative resilience of the ISM services index in June should help dampen speculation that the economy is at risk of an imminent recession,” said US economist Michael Pearce of Capital Economics.

“Surveys paint a consistent picture of an economy growing below trend rather than on the brink of recession.”

Market reaction: The Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
edged higher in Wednesday trading. US companies are growing at the slowest pace in two years, ISM shows, as the economy slows

Brian Lowry

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