US services PMI slips to 54 in June, missing estimates as growth cools

The US services sector grew at a slower pace than forecast in June, with the ISM non-manufacturing index slipping to 54 from 54.5, as a softening labor market tempered demand across the economy's largest segment. The reading undershot the 54.3 consensus estimate from economists polled by the Wall Street Journal, marking the second consecutive monthly decline after the index peaked at 54.9 in April.

"Gasoline prices rise like a rocket and they fall like a feather," said Tom Lee, head of research at Fundstrat Global Advisors. "The good news is, of course, that means there's less inflation later this year." The moderation in services activity aligns with a broader deceleration in price pressures, with the ISM manufacturing prices paid index falling to 73% in June from 82.1% in May — the steepest monthly drop since the measure began its 21-month expansion streak.

The ISM's employment subindex likely reflected the broader labor market softening captured in last week's payrolls report, which showed the US economy added 57,000 jobs in June — less than half the 115,000 economists had expected. The unemployment rate edged down to 4.2%, partly because workers left the labor force rather than due to stronger hiring. The S&P 500 closed at 7,483.24 on Friday, up 1.8% for the holiday-shortened week, while the VIX fell to 15.81. The US 10-year yield edged up to 4.49% as traders reduced expectations of further Fed tightening.

The services sector accounts for more than two-thirds of US economic activity, making the ISM survey one of the most closely watched indicators of underlying growth. With the manufacturing PMI also declining to 53.3 in June from 54.0 in May, the data points to a broad-based moderation that could keep the Fed on hold through the remainder of 2026. CME FedWatch data shows traders now price a 19.8% probability of a rate hike at the July meeting, down from 28.9% before the payrolls report.

Cooling Demand Across Sectors

The ISM manufacturing survey showed new orders expanded for a sixth consecutive month at 56%, down from 56.8% in May, while production slipped to 52.2% from 54.3%. Supplier deliveries slowed for a seventh straight month, and customers' inventories remained too low for a 21st consecutive month — suggesting supply chains have not fully normalized despite the moderation in demand.

Input costs remain elevated, with 55.1% of manufacturers reporting higher prices in June, but the pace of increases has moderated significantly from the 70.3% peak in April. The moderation in price pressures supports the view that inflation may have peaked. Fundstrat's Lee has lifted his year-end S&P 500 target to 8,000, citing six factors including the ISM moving above 50 after three years below that threshold and oil returning to pre-war levels.

Rate Path in Focus

The combination of softer services activity and a cooling labor market strengthens the case for the Fed to hold rates steady at its July meeting. NAB Economics expects the Fed to remain on hold through 2026, with as many as three RBA rate cuts penciled in for 2027. The Australian dollar could fall back to 0.65 next year under that scenario, NAB said, though it could return to 0.70 or above in the absence of near-term Fed rate hikes.

The next major data point for the Fed will be the June consumer price index release, due later this month, which will show whether the moderation in producer prices is flowing through to the consumer level. The DXY dollar index weakened 0.5% to 100.8 last week, while gold rose 2.4% to $4,122 an ounce as the softer data reduced the appeal of rate hike bets.

This article is for informational purposes only and does not constitute investment advice.