The US non-manufacturing sector reached a four-month high in June, with the gap between non-manufacturing and manufacturing industries reaching its largest level since 2015.

On Thursday, data released by the Institute for Supply Management (ISM) showed that the US ISM Non-Manufacturing Index for June reached 53.9, the fastest expansion rate in four months, thanks to the acceleration in business activity and orders. The sub-index for service prices dropped to a new low since March 2020.

Specifically, the US ISM Non-Manufacturing Index for June came in at 53.9, significantly better than the expected 51.3, with the previous value for May at 50.3. The threshold for expansion or contraction is 50.

As for the important sub-indices:

The Business Activity Index reached 59.2, a five-month high, increasing by 7.7 points from May's 51.5. This sub-index corresponds to the Factory Output Index in the ISM Manufacturing data, which hit a three-year low in May.

The New Orders Index, which measures future activity, also rose in June, climbing 2.6 points from May's 52.9 to 55.5.

The Employment Index increased by 3.9 points from May's 49.2 to reach a four-month high of 53.1, indicating that service providers are expanding their workforce after a contraction in May.

The Input Prices Index further declined in June, dropping by 2.1 points to 54.1. This index is now closer to pre-COVID-19 levels, indicating a relief in inflationary pressures.

After a sharp increase in May, the Inventory Index decreased by 2.4 points to 55.9 in June, indicating a more moderate growth rate. The index measuring respondents' evaluation of inventory levels, which also surged in May, fell significantly from 61 to 54 in June, although it remains relatively high.

The Backlog of Orders Index for the non-manufacturing sector increased from 40.9 in May to 43.9, but it still indicates contraction. This sub-index experienced the fastest contraction in 14 years in May.

The improvement in business activity and new orders from May suggests a recovery in demand. Analysts point out that the ISM Non-Manufacturing data reflects a healthy and resilient demand for services. Americans tend to spend on experiences while limiting purchases in the goods sector. This dynamic helps explain the widening gap between the ISM Manufacturing and Non-Manufacturing data. Currently, the Non-Manufacturing Index is nearly 8 points higher than the Manufacturing Index, marking the largest gap since August 2015.

Earlier this week, data showed that the US ISM Manufacturing Index for June was only 46, unexpectedly hitting a more than three-year low since May 2020. It has been in contraction for eight consecutive months, the longest period below the threshold of 50 since 2008-2009. Declines in production, employment, and input prices have all weighed on the manufacturing sector last month, intensifying concerns about a potential economic downturn in the second half of the year. The Markit PMI data released earlier on the same day:

• The final value of the US June Markit Services PMI was 54.4, expanding for the fifth consecutive month, with an expected value of 54.1. The initial value for June was 54.1, and the final value for May was 54.9. The sub-index for business expectations rose to 69.9, reaching a new high since May 2022. The sub-index for input prices also increased to a new high since January 2023.
• The final value of the US June Markit Composite PMI was 53.2, also expanding for the fifth consecutive month, with an initial value of 53. The sub-index for output prices decreased to 55, reaching a new low since January 2023. The sub-index for employment also decreased to a new low since March 2023.

It should be noted that the trend reflected by the input price sub-index of Markit Services is not consistent with the price sub-index under ISM data.

Regarding the Markit PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated:

The US service sector economy showed encouraging resilience in June, helping to offset the impact of manufacturing output contracting once again and ensuring a steady overall pace of economic growth.

Surveys indicate that overall GDP growth in the US for the second quarter was slightly below 2%, despite a slowdown in momentum in June.

Despite the adverse factors of rising living costs and interest rates, there is unexpectedly strong demand for the service sector, with spending still supported by consumer expenditure in the aftermath of the pandemic. Rising interest rates and recent market gains have also stimulated demand for certain financial services.

A cause for concern is that although sales price inflation has cooled further, cost growth in the service sector increased in June, which has been the main source of inflation concerns in recent months. Wage increases, in particular, have driven up costs and may continue to keep price inflation stubbornly high in the coming months.