2025 Service Sector Decline: How Fed's Inflation Battle Influences Prices and Growth
Explore how the Federal Reserve's persistent interest rate hikes in 2025 are cooling down the service sector, impacting new orders and consumer spending, and shaping the broader economic outlook.
Essential Insights
- The services sector underperformed expectations in June 2024, signaling economic cooling.
- New service orders contracted for the first time in over 18 months, highlighting weakened demand.
- Elevated borrowing costs driven by the Federal Reserve's inflation-fighting measures continue to dampen consumer and business activity.
In June 2024, the service industry's performance fell short of forecasts as inflationary pressures and elevated interest rates restrained demand.
The Institute of Supply Management's (ISM) Services Purchasing Managers’ Index (PMI) declined for the second time in three months, ending a 15-month streak of growth before April. Experts surveyed by ZAMONA anticipated a smaller drop than the nearly 5-point decrease from May.
Economists point to subdued demand as a key factor, with new orders signaling contraction for the first time since late 2022.
Comprising sectors like healthcare, hospitality, insurance, finance, and utilities, services are highly sensitive to consumer spending shifts. Rising prices and costly borrowing are significant headwinds for these industries.
Federal Reserve's Role and Economic Impact
The Federal Reserve has maintained interest rates at a 23-year peak to curb spending by increasing borrowing expenses. This strategy appears effective in slowing economic momentum.
Bill Adams, chief economist at Comerica Bank, noted, "The Fed will welcome the ISM Services PMI's indication of easing inflation but remains cautious as economic momentum wanes. Inflation control remains their top priority."
The service sector’s slowdown joins recent trends in construction and manufacturing, both affected by high rates, alongside growing consumer economic concerns.
Wells Fargo economists Tim Quinlan and Shannon Seery Grein advise monitoring these developments without panic, stating, "From an optimistic viewpoint, this cooling aligns with the Fed's goals: moderating labor markets and easing price pressures."
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