The June ISM services PMI fell to 60.1 from 64 and that was below the estimate of 63.5 and at a 4 month low. New orders fell 1.8 pts m/o/m but still high at 62.1. Backlogs continue to rise as a result of slower deliveries. Backlogs were up by 4.7 pts to 65.8, the highest on record dating back to 1997 while inventories fell further. Supplier deliveries did fall a touch, by 1.9 pts but off the 2nd highest since 1997. Prices paid fell slightly, by 1.1 pts to 79.5 off the highest since 2008. While we already saw the June jobs data, Employment fell a sharp 6 pts to just under 50 at 49.3. It wasn’t for lack of demand as we know however. ISM cited company comments that include: “Increasingly difficult to find qualified candidates to fill open positions” and “Employees have been somewhat slow to return to work, and there has been turnover as some pursue new opportunities in a hot job market.” While only some service industries do business internationally, exports fell a sharp 9.3 pts to 50.7 but imports jumped by 7.8 pts to 58.2.
Of 18 industries surveyed, 16 saw growth vs all 18 in May.
ISM summed up the report by saying what we already know, “The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all time high. Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions.” In other words, stagflationary influences are creating a really choppy economic environment that limits visibility and the ability of businesses to plan.
This reality continues to be reflected in the further flattening of the yield curve where the 2s/10s spread is down to 113 bps, the lowest since mid February. As inflation breakevens are barely down, real yields are falling again with the 10 yr real yield at the most negative since mid February too at -.98%.
While I’ve emphasized that we are experiencing the most intense inflation pressures since the 1970’s, I’m only worried about persistent ‘higher’ inflation, not ‘high’ inflation but again, in the context of where global interest rates are, that will be a problem if realized. Now that economic growth is being stunted by these pressures, it is a stagflationary environment that the modern day central bank has never experienced.