PMI Business contraction activity eases, ISM Service jumps back into expansion zone

June PMITM data signaled a notably softer rate of contraction in business activity across the U.S. service sector as many companies began to reopen following the easing of coronavirus disease 2019 (COVID-19) restrictions. The loosening of lockdown measures also led to the broad stabilization of new orders, while export sales rose for the first time so far in 2020. As a result, the rate of job shedding softened markedly as some firms highlighted the hiring of new employees to help fulfil new business inflows. Excess capacity also eased as backlogs fell only fractionally. Although business confidence was historically muted, it signalled renewed optimism as hopes of stronger demand drove sentiment higher. 

Meanwhile, inflationary pressure returned as both input prices and output charges rose for the first time since February, with both increasing at solid rates. The seasonally adjusted final IHS Markit US Services Business Activity Index registered 47.9 at the end of the second quarter, up significantly from 37.5 in May and above the earlier released 'flash' figure of 46.7. The marked easing in the rate of output contraction was in part linked to the reopening of service providers and the gradual return of customer demand. The pace of decline was the slowest in the current four-month sequence of decline. 

New business inflows meanwhile broadly stabilized in June following three successive monthly contractions. The rate of decline eased notably from April's record as a number of firms reported an uptick in customer demand following the gradual reopening of the economy. At the same time, new export orders for services expanded at the sharpest rate in almost a year, although the rate of growth was only fractional. 

Inflationary pressures intensified for the first time since February at the end of the second quarter, as both input prices and output charges increased. Companies registered a solid rise in cost burdens as some suppliers hiked prices following the resumption of operations at service providers. The rate of input price inflation was the fastest since February 2019. 

In response to higher input costs, firms partially passed on higher supplier prices to clients through greater selling prices. The increase was solid overall and the sharpest for 16 months. Meanwhile, service providers continued to cut their workforce numbers, but at a much reduced pace. Although some companies noted that lay offs stemmed from ongoing closures and subdued demand, others resumed hiring as new order inflows stabilized. 

Excess capacity remained evident in June, albeit to a lesser extent than prior months. The latest reduction in backlogs of work was only fractional as firms processed unfinished business upon the resumption of operations. Some respondents also stated that strengthening client demand had put pressure on capacity.

Finally, business confidence returned to positive territory at the end of the second quarter, amid hopes of further boosts to new sales. Optimism towards the outlook for output follows two consecutive months of pessimism. Although positive, sentiment remained historically subdued.

...meanwhile...

 
Economic activity in the non-manufacturing sector grew in June after two consecutive months of contraction, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM^® Report On Business^®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management^® (ISM^®) Non-Manufacturing Business Survey Committee: “The NMI^® registered 57.1 percent, 11.7 percentage points higher than the May reading of 45.4 percent. This reading represents growth in the non-manufacturing sector after a two-month period of contraction preceded by 122 straight months of expansion. This is the largest single-month percentage-point increase in the NMI^® since its debut in 1997. (In April, the index suffered its biggest one-month decrease, a 10.7-percent drop.) The Business Activity Index registered 66 percent, up 25 percentage points from May’s figure of 41 percent. The New Orders Index registered 61.6 percent; 19.7 percentage points higher than the reading of 41.9 percent in May. The Employment Index increased to 43.1 percent; 11.3 percentage points higher than the May reading of 31.8 percent.