The service sector of the U.S. economy expanded in June, but at a slower pace than in May, according to a monthly survey of supply managers released Thursday. The expansion was also slower than analysts had been expecting.
The Institute for Supply Management, a research group based in Tempe, Ariz., reported that its index of activity in the service sector stood at 57 in June, versus analysts’ expectations of 59.
In the prior month, the index came in at 60.1, in line with expectations. A reading of 50 or more indicates expansion, while below 50 indicates contraction.
June marked the 39th consecutive month of expansion in the service sector of the economy.
The indicator is closely watched since it is one of the earliest readings on economic activity in the prior month. The services sector — including banking, construction, retailing and travel — makes up about two-thirds of economic activity in the United States.
While signaling a slower rate of expansion overall, the report found that strength in the service sector was broad, with 14 of the 16 industry groups in the non-manufacturing sector reporting expansion.
Prices for fuel and raw materials remained a concern, but overall the indication was for continued economic growth in services June, according to Anthony Nieves, head of the ISM’s service sector committee.
Treasury prices edged higher following release of the report, as bond investors took the signal of moderating growth as a benign signal for inflation. The yield on the 10-year note, which falls when the price rises, was down 0.21 percentage points at 5.202 percent.
Economists have been seeing signs of slower growth in the economy in recent months as consumer spending softens and the housing sector cools off. Higher energy prices have also been weighing on the economy.
On Monday, the ISM reported that the manufacturing sector expanded in June, but at a slower pace than expected. Manufacturers had said they were seeing their prices for raw materials ease slightly.
The ISM’s manufacturing index registered 53.8 last month, slightly below the level of 54.4 in May and the slowest measure of growth since last August. Analysts had been looking for a reading in the manufacturing index the range of 55 to 56.
Weaker consumer spending could spell trouble for a number of service-oriented companies, especially retailers. Also, in addition to construction companies, the housing slowdown could have a ripple effect on other service providers like mortgage underwriters, which have been hit by higher interest rates along with other financial services providers.
Many are hopeful that the Federal Reserve will refrain from raising interest rates for awhile following its 17th consecutive rate rise last week, but off-and-on concerns about inflation have spooked investors in recent sessions.
In addition to causing problems to their own businesses, rising energy prices are also having a domino-like effect on service providers by leading consumers to be more stingy, says Mark Vitner, senior economist Wachovia Corp. in Charlotte, N.C. Recent flooding in eastern states could wear down consumer spending as well.
With several signs pointing to decelerating growth, Vitner’s team now expects to see overall economic growth of just 2.6 percent in the second quarter, well below the strong growth in the first quarter, which was revised upward to 5.6 percent from 5.3 percent just last week.
That strong first-quarter growth also raises the bar for the second quarter, since unlike many other indicators gross domestic product is measured sequentially instead of year-over-year.