Non-manufacturing ISM Report Chills Stocks

This morning’s report from the Institute for Supply Management (ISM) on non-manufacturing PMI showed that the US services sectors is growing at its slowest pace in two and a half years. The index reading for June was 52.1%, where any reading about 50 indicates expansion. The reading for June was -1.6% lower than the 53.7% index reading in May.

The services sector is still growing, just more slowly than it has been. The sub-indexes for business activity, new orders, inventories, and order backlogs declined, while employment continued to rise. New orders declined the most, -5.5%, followed by a -3.9% decline in business activity, and a -3.5% decline in new export orders. Employment rose by 1.5%.

The weakness in new orders and backlogs indicates that spending may be tapering off, as both consumers and businesses keep closer tabs on discretionary spending.

The services PMI is generally thought to be a less timely barometer of US economic activity than the ISM’s manufacturing PMI, which came in at less than 50% earlier this week, the first negative reading in three years. Taken in combination, though, the picture they paint does not include strong economic growth going forward.

Equities posted morning lows shortly after the ISM report was released this moring, but have since recovered to a more modest loss or, in the case of the NASDAQ index, a modest gain.

Paul Ausick