The U.S. services sector's pace of expansion moderated slightly in June, but hiring activity saw a significant rebound. This indicates the sector retains substantial resilience, supported by easing cost pressures and sustained demand.

Data released on Monday by the Institute for Supply Management (ISM) showed the Services PMI for June fell to 54.0 from 54.5 in May, slightly below market expectations of 54.2. The index remained above the 50-point threshold that separates expansion from contraction for the month, signaling continued growth in the sector, albeit at a slower pace.

While business activity and new order growth cooled, the employment sub-index improved markedly. The prices paid index dropped to a four-month low, reflecting a moderation in the cost pressures facing businesses.

Services Growth Moderates Amid Steady Demand

Detailed components of the report showed the business activity and new orders indices both declined from the previous month, though they stayed in expansion territory. This suggests demand in the U.S. services sector, while slightly cooler, remains on a solid growth footing.

Concurrently, the inventories index saw a notable decline. The inventory measure, which had surged significantly in May, fell sharply in June. Meanwhile, the backlog of orders index increased again, indicating a rise in unfinished orders held by companies.

Overall, the growth momentum in the U.S. services sector slowed compared to May but has not yet shown clear signs of a significant downturn.

Employment Index Posts Largest Gain of 2024

In contrast to the slight dip in the headline PMI, employment was the standout positive in the latest report. The ISM Services Employment Index recorded its largest monthly increase so far in 2024 and moved back into expansion territory for the first time since February, indicating a growing number of service-sector firms are beginning to add staff. This points to a recovery in hiring intentions as demand remains resilient.

However, this survey result presents a contrast with the official U.S. non-farm payrolls data for June released last week. The official figures showed job additions slowed from the robust growth seen over the prior three consecutive months, highlighting continued divergence in the labor market picture across different surveys.

Easing Cost Pressures Create Room for Hiring

On the price front, the ISM Prices Paid Index fell to 67.7, its lowest level in four months, indicating a deceleration in the pace of cost increases for businesses.

A notable recent pullback in international crude oil and gasoline prices has been a key factor driving the easing of cost pressures. Energy prices had surged earlier, influenced by Middle East tensions, but have cooled significantly recently following a provisional agreement between the U.S. and Iran.

With energy costs retreating and consumer demand holding firm, corporate profit margins have seen some improvement. This has also provided more ample conditions for companies to expand their hiring.

In summary, the June ISM services data indicates that the services sector, which constitutes the bulk of the U.S. economy, continues to expand. Although the pace of growth has moderated, the improvement in employment and the decline in price pressures offer fresh positive signals for a potential soft landing of the U.S. economy.