The service sector continued to moderate, despite the current shift from spending on goods to services. Higher inflation, mostly from energy and food prices, kept consumers away from spending more on discretionary services.

The Institute for Supply Management’s service index inched down to 55.3 in June, the slowest level of growth in more than two years since May 2020, when it was at 45.2.

The index indicates an overall expansion only when it is above 50.1. Despite being on a 25-month streak of growth, the index has come closer to showing overall contraction.

The slowdown continued to be driven by lower new orders—a proxy for future demand—which fell to 55.6 from 57.6 in May. On top of that, there were three components that fell to contraction territory from expansion in June: employment, inventories and imports.

Lower inventories and imports were likely because of the COVID-19 lockdown in China and supply-chain bottlenecks.

“The shutdowns in China due to the zero-COVID policy have adversely impacted our supply chain,” one respondent in the health care industry said.

Inflation remained a challenge as higher prices have forced consumers to spend more on essentials while staying away from discretionary service spending such as retail. The prices paid component declined slightly to 80.1 from 82.1 on the month, staying elevated.

The takeaway

We expect the service sector to continue to grow in the coming months, yet at a slower pace as economic activities slow while energy and food prices remain high.