The US services sector continued its expansion in June, with business activity and new order growth moderating but employment returning to growth, indicating overall economic resilience. However, firms widely reported persistent pressures from inflation, tariff costs, and supply chain tightness related to data center construction, suggesting future operating cost pressures remain a significant concern.

Data released on Monday by the Institute for Supply Management (ISM) showed the Services PMI for June registered 54.0, a slight 0.5-point decrease from May's 54.5. Despite the dip, the index has now remained above the 50-point threshold separating expansion from contraction for 24 consecutive months and was above the 12-month average of 53.1, signaling continued sector growth. Historically, a PMI level of 54.0 corresponds to an annualized real GDP growth rate of approximately 1.9%.

Among the sub-indices, the Business Activity Index fell to 55.4 from 57.7, and the New Orders Index declined to 55.1 from 57.3, both showing slower growth compared to the previous month but still indicating expansion. Notably, the Employment Index rose to 51.2 from May's 47.9, marking its first return to expansionary territory in four months and reflecting an improvement in hiring demand.

Simultaneously, the Backlog of Orders Index climbed to 54.9, reaching its second-highest level in nearly four years, underscoring sustained demand resilience in the services sector.

Price pressures showed some signs of easing. The Prices Index dropped to 67.7 in June, its lowest level since February and the first time it has fallen below 70 in four months. However, this index has now remained above 50 for 109 consecutive months, indicating that purchasing costs for businesses continue to rise.

ISM noted that while prices for energy products like gasoline and diesel have recently declined, costs for data center-related raw materials such as copper, aluminum, memory, and HVAC equipment continue to increase.

The survey indicated ongoing improvements in supply chain conditions, with the Supplier Deliveries Index falling to 54.4. Despite the drop, it has remained above 50 for 19 consecutive months, signifying that delivery times are still lengthened. Meanwhile, the Imports Index retreated to 49.4, moving back into contraction territory, and the Inventory Index fell significantly to 51.2, suggesting the earlier trend of businesses stockpiling in advance is gradually subsiding.

Data center construction remains a significant factor affecting supply chains. ISM highlighted that items like memory, electronic components, transformers, cables, and switchgear are listed by businesses as experiencing tight supply. Several surveyed firms reported that AI data center construction continues to drive up demand for related equipment and is extending lead times for certain materials.

Additionally, costs from the US-Iran conflict, tariff policies, and rising logistics expenses continue to exert pressure on corporate purchasing costs.

ISM stated that while price pressures have moderated somewhat compared to earlier periods, businesses remain cautious about future cost trends. With shipping through the Strait of Hormuz gradually normalizing, energy-related costs could potentially decline further this autumn if international oil prices stabilize. However, ongoing investments in AI infrastructure, labor costs, and tariff factors may continue to support business operating expenses. Whether service sector inflationary pressures will ease further in the future remains to be observed.