United States services sector activity slowed modestly in June as a surge in business orders linked to the Middle East conflict faded, though employment returned to growth after three consecutive months of contraction, signalling continued resilience in the labour market.
The Institute for Supply Management (ISM) said on Monday its Services Purchasing Managers' Index (PMI) edged down to 54.0 in June from 54.5 in May.
A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.
One of the report's strongest developments was the Employment Index, which expanded for the first time in four months. Some survey respondents attributed stronger hiring to increased tourism associated with international soccer events, boosting demand for air travel, accommodation and hospitality.
The fastest-growing services industry in June was Arts, Entertainment & Recreation (AE&R).
Since the impact of big events is limited because such industries as AE&R, Accommodation & Food Services and Transportation & Warehousing are small segments of sector gross domestic product (GDP), the World Cup “was not a driver, but it was certainly welcome”, Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee, said after the report was released on Monday.
Several broader trends also supported activity during the month:
- Moderating oil and gas prices following the ceasefire and negotiations between the United States and Iran helped the Prices Index fall to 67.7, below 70 for the first time in four months.
- Real Estate, Rental & Leasing, the largest services industry, returned to expansion.
- Business Activity (55.4) and New Orders (55.1) eased but continued to indicate solid growth, while the Backlog of Orders Index rose 3.6 points to 54.9.
“These readings and developments, taken with respondent commentary, seem to indicate that supply chains are stabilising amid sustained business activity,” Miller told a conference call of reporters.
“That’s giving confidence to business, especially for sustained and modest hiring.”
The survey's measure of new orders slipped to 55.1 from 57.3 in May, while order backlogs increased during the month.
A similar trend emerged in last week's ISM manufacturing survey. Commodity prices, including oil, had surged during the four-month conflict involving Iran before easing after Washington and Tehran agreed to a ceasefire, allowing crude prices to retreat towards pre-conflict levels.
Lower energy prices also helped ease inflationary pressures across the services sector. ISM's Prices Index fell to 67.7 from 71.3 in May, although it remained at a level consistent with elevated cost pressures.
One survey respondent from the accommodation & food services sector noted:
“We continue to experience higher prices due to the Persian Gulf conflict through rising diesel fuel costs and increased input costs for resin-based packaging. The brunt of the impact will be experienced in the third quarter (Q3) of 2026, but we are feeling the impact now.
"Suppliers are aggressively attempting to pass through price increases.”
Another respondent in the health care & social assistance sector said:
"Despite economic headwinds like persistent inflation, patient volumes and overall business activity remain strong reflected mainly by outstanding revenue performance. Supply chains remain resilient as well; back orders are at a historical low, and few if any critical products are experiencing difficulties.
"Labour is steady, as we continue to add full-time workers while the forecast remains positive. Given the continuation of the conflict in the Middle East, we are beginning to hear that cost of goods increases are on the horizon but have yet to materialise.
"Cost increases are in focus for the next quarter.”
Businesses also continued investing heavily in artificial intelligence, supporting demand for semiconductors and other technology components.
ANZ analysts said the report pointed to improving supply chain conditions.
"Inventories fell sharply, down 11.3pts to 51.2, suggesting precautionary stock-building dynamics are unwinding, with respondent comments indicating that supply chains are stabilising. However, some commodities remain in short supply, particularly those linked to building data centres."
Supplier delivery times remained elevated during June. The Supplier Deliveries Index eased to 54.4 from 55.2 in May, with readings above 50 indicating slower deliveries. While slower delivery times are often associated with stronger demand, ISM suggested current delays were more reflective of lingering supply chain constraints than accelerating economic activity.
The Atlanta Federal Reserve's GDPNow model is currently estimating the U.S. economy will grow at an annualised rate of 1.2% in the second quarter, partly reflecting a wider goods trade deficit.
The economy expanded at a 2.1% annualised pace in the first quarter, although consumer spending slowed sharply.
Most economists continue to expect the Federal Reserve to raise interest rates later this year despite moderating job growth. June's employment report showed hiring slowed considerably, while payroll gains for the previous two months were revised lower.
