Service Sector Contraction Sparks Economic Concerns | Episode 152 | 07-03-24

In our latest podcast episode, we delve into some pressing economic issues that could have far-reaching implications for the broader economy and individual financial decisions. The latest ISM services report has revealed a worrying trend: a drop to 48.8, indicating the first contraction in the service sector since May 2020. This contraction is particularly concerning given the current economic environment marked by high inflation and mounting credit card debt.

The significance of the ISM services report cannot be overstated. Consumers spend the majority of their money on the service sector, which includes everything from dining out to healthcare. A contraction in this sector could signal a slowdown in consumer spending, which is a crucial driver of economic growth. The reading of 48.8 is especially alarming because any reading below 50 indicates contraction, while a reading above 50 indicates expansion. This drop is a stark reminder that the economy is not out of the woods yet, despite some recent positive indicators.

Adding to the concerns is the employment index, which plummeted to 46.1. This is significantly lower than the expected 49.5 and suggests that job growth in the service sector is also faltering. Employment is a key component of economic health, and a decline in this area could have a ripple effect across other sectors. This is particularly troubling as we approach the release of the crucial jobs report, which will provide further insights into the state of employment in the country.

New orders in the service sector also showed a declining trend, which is another red flag. New orders are a leading indicator of future activity, and a contraction here suggests that businesses are not seeing the demand they had anticipated. This could lead to reduced business investments and potentially even layoffs, further exacerbating the economic challenges.

So it's one of my favorite economic readings that we got this morning and you guys have heard me talk about it. It's the reading on the service sector of our economy. This is Wednesday, july 3rd, and we're here to discuss the ISM services report. The reason why I like to focus on this is because consumers spend the majority of their money on the service sector and we've seen the service sector continue to be very resilient throughout high inflation, high credit card debt, and today was a really disappointing reading. We got on ISM services for the month of June. The expectation was that services continued to expand for the month of June and unfortunately it fell all the way down to 48.8. And if you've listened to my podcast in the past, a reading above 50 is expansion and a reading below 50 is contraction. It's the lowest level we've seen since the pandemic, since May of 2020. The employment component also was much weaker than anticipated, at 46.1. They expected at 49.5. New orders also contracting, but what we were looking at was prices paid, because that's where the inflation has been sticky on the service side and that also came down a bit. It's at 56.3 versus 58.1 in May. It's the lowest since June of 2023, so about a year low, but it still is high, and this is something that we can't ignore, the Fed won't ignore. It's very disappointing from the economic standpoint, but we need these inflation, especially that sticky inflation, to come down. So that's what we have today.

It's the last day before the 4th of July holiday. Tomorrow, Friday will be the jobs report. hope everyone enjoys the Independence Day celebrations. We'll come back, though, and we'll give you that update on Monday. The jobs report is an extraordinarily important report, especially since today we got the first reading on ADP employment change, and it was mixed. It was a little bit weaker than anticipated. So the concern is we might get some mixed data here on Friday, but we'll be back to give you lots of details about that on Monday. If you have any questions or comments, please feel free to reach out to podcasts at Verdence. com. Thank you.