The economic outlook in the United States is rapidly deteriorating, as a measure of business services activity fell sharply in May. The Institute for Supply Management (ISM) reported that its services PMI index fell to 50.3 from 51.9, well below the 52.2 expected. With this significant drop, the index is dangerously close to entering a recession. With a threshold of 50, the PMI index indicates expansion above that level and contraction below it.
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In more detail, the non-manufacturing sector was constrained by a significant drop in the forward-looking new orders component, which fell to 52.9 from 56.1 previously. In addition, the employment indicator fell from 50.8 to 49.2 points. This suggests that hiring conditions are deteriorating, which adds to worries about the overall economic situation.
In a welcome development for the Fed, the survey’s prices paid index fell to 56.2 from 59.6. If this trend continues, it may help to alleviate inflationary pressures on service providers. It may also give the central bank an opportunity to take a more cautious stance, as weaker inflation data may justify a pause in raising interest rates.
The US dollar, as measured by the DXY index, immediately reversed most of its session gains in response to the weaker-than-expected services PMI numbers. Tumbling Treasury yields exacerbated the decline. These market reactions suggest that the Fed may use this data to justify keeping rates unchanged at its upcoming June meeting.
While it is important not to jump to conclusions based on a single report because month-to-month data can be volatile, if other economic indicators confirm a sharp downturn in the economy, fears of an impending recession may become more justified. Monitoring the overall economic landscape will provide a more complete picture of the situation and aid in determining the best course of action.
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