With the unemployment rate reaching its highest point in over two years, signs of weakness are evident in many sectors of the US economy.
According to a report by CNN, a survey of US businesses that profit from providing various services shows a gradual decrease in consumer demand from this summer up to now. This sluggish trend can also be observed in the latest consumption data, which starkly contrasts with the frenzy of spending by Americans on movies and large concerts last summer.
The latest monthly survey by the Institute for Supply Management (ISM), which measures activity in the service sector, shows that last month, new orders and overall economic activity unexpectedly slipped into contraction territory. The overall index for June fell from 53.8 in May to 48.8, with the new orders index experiencing an even sharper decline from 54.1 to 47.3. (Readings above 50 indicate expansion, while below that threshold indicates contraction.)
If this apparent slowdown in demand persists for a significant period of time, it could lead to a slowing in the pace of hiring by service-providing businesses, and possibly even layoffs. The vast majority of employment opportunities in the US are considered to be service-oriented, with specifically 86% of the total employment in the US as of June being in the service sector.
American consumers are facing pressures from ongoing high inflation, the highest interest rates in over two decades, dwindling savings due to the pandemic (as per certain metrics), and increasing debt burdens. Government statistics show that consumer spending, which accounts for about 70% of the US economy, has slowed down over the past few months.
According to the latest retail sales data from the US Department of Commerce, spending at restaurants and bars in May declined by 0.4%. A retail company told the ISM, “As inflation persists, do customers have enough discretionary funds to spend?”
The recruiting pace of service-providing businesses has slowed down. According to the latest data released by the Department of Labor on Friday, from April to June, these companies added an average of 168,000 job opportunities per month. This is far lower than the average for the previous three months (January to March) at 241,000 job positions added per month. Last year, the service industry averaged the addition of 228,000 employment opportunities per month. However, recruitment trends vary within the service industry, which occupies a large portion of the job market.
Last month, employment in the retail sector contracted for the first time since November, with 48,900 temporary help service positions eliminated, affecting wider professional and business service super sectors, which lost 17,000 workers. Healthcare has been a highlight of the service industry, with rapid job growth over the past few decades, excluding the job losses in 2020 due to the Covid-19 pandemic. Nonetheless, some companies in this sector have recently observed weakened demand.
A healthcare and social assistance company stated in the latest ISM survey, “With patient numbers approaching record lows last month, service demand has slowed down.”
As the overall US economy rebounds from the Covid-19 pandemic, the job market saw a remarkable recovery, leading to the unemployment rate dropping to a half-century low of 3.4% in 2023. However, the situation has recently eased, with the unemployment rate currently at 4.1%, the highest level since November 2021, and new applications for unemployment benefits are on the rise.
Federal Reserve officials are closely monitoring the job market for any concerning signs of weakness. Fed Chair Powell will testify next week on Capitol Hill regarding the semi-annual monetary policy report released on Friday morning.
He will have the opportunity to adjust the information on labor market and interest rate outlook during the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.