Services output returns to growth in June, reports ISM

Services sector activity returned to growth in June, following contraction in May, for the first time after 10 consecutive months of growth, according to the new edition of the Services ISM Report on Business, which was released today by the Institute for Supply Management (ISM).

The June Services PMI, at 50.8 (a reading of 50 or higher signals growth), increased 0.9% over May’s 49.9 reading. Prior to May, the Services PMI had seen growth in 56 of the previous 59 months, going back to the initial recovery from the pandemic in June 2020. And June’s reading was 1.6% below the 12-month average of 52.4, with October’s 55.8 and May’s 49.9 marking the respective high and low readings over that period.

ISM reported that 10 of the services sectors it tracks saw growth in June, including: Other Services; Transportation & Warehousing; Utilities; Arts, Entertainment & Recreation; Management of Companies & Support Services; Wholesale Trade; Public Administration; Retail Trade; Information; and Real Estate, Rental & Leasing. Sectors seeing contraction included: Agriculture, Forestry, Fishing & Hunting; Construction; Mining; Health Care & Social Assistance; Professional, Scientific & Technical Services; and Educational Services.

The report’s subindexes that factor into the NMI were mixed from May to June, including:

• Business Activity/Production: at 54.2, up 4.2% from May, growing after being directionally unchanged, with 11 sectors seeing an increase;
• New Orders, at 51.3, up 4.9%, growing after contracting in May, which followed April’s 52.3 reading and its first month of contraction since June 2024’s 47.8 reading, with eight sectors reporting growth;
• Employment, at 47.2, fell 3.5%, following growth in May, with five sectors reporting employment gains; and
• Supplier Deliveries, at 50.3 (a reading above 50 indicates slower deliveries), down 2.2% from May, slowing, at a slower rate, for the seventh consecutive month, with six sectors reporting slower deliveries

Comments from ISM member panelists included in the report highlighted various trends in the services sector, with tariffs again receiving a fair amount of attention.

“Business growth is slow,” said a Real Estate, Rental & Leasing panelist. “Global economic conditions impacted by U.S. tariffs are creating significant uncertainty, which is holding businesses back from making short- to medium-term business decisions.”

And an Information sector panelist observed that general uncertainty around the economy continues to drive increases in prices, adding that many SaaS (software-as-a-service) vendors are using the AI (artificial intelligence) boom to restructure pricing and products, resulting in massive increases.

In an interview, Steve Miller, Chair of the ISM Services Business Survey Committee, said that even with the employment and supplier deliveries readings down in June, new orders and business activity readings were up enough to not only make up for that but also help the Services PMI get back to above 50—which he called a good sign.

“The main concern is the Prices index [which fell 1.2%, to 67.5, increasing, at a slower rate, for the 97^th consecutive month] staying in the high 60s range,” said Miller. “We are starting to get comments from panelists saying they are seeing price increases flowing through as a result of tariffs primarily. The good news there is that the China tariffs pause runs into August.”

In the ISM’s recently-issued Semiannual report, Miller said ISM panelists said that they would not seek to pass through tariff-related pricing increases for three-to-six months, from once they start seeing them, with those increases now starting to occur. He called it something to watch out for, especially if prices remain in this current range.

“We are starting to get commentary that is saying those cost increases are flowing through, and we’ll expect to see more of that,” he said.

With the services sector growing in five of the first six months of 2025, Miller cautioned that may not be the case over the second half of the year.

Based on observations from different ISM surveys, Miller said a key takeaway was that the second half of 2025 could be flat, with findings from May and June indicating that as being the case. And he added that should the federal budget reconciliation legislation, or the “One Big Beautiful Bill,” be signed into law, consumer spending could see a boost from the no taxes on tips component, but that is contingent on when it takes effect.

“That piece, along with the deductibility of additional state and local taxes means you don't need to put as much money in escrow or save to be able to pay that at the first of the year,” he said. “I think that's a big positive sign. That'll be a boost for lots of people and the other piece is being able to deduct car loans, if that stays in, will also be positive, too. I think there's a lot of positive momentum on the consumer side, which will impact services more than it will impact manufacturing.”