As the unemployment rate reaches its highest point in over two years, many areas of the USA economy are showing signs of weakness.

According to surveys of US businesses providing various services, consumer demand has seemed to gradually decrease from this summer until now. This weakness is also evident in the latest consumer data - a far cry from the profitable summer consumer spending trend of Americans paying for movies and well-known concerts last year.

The latest monthly survey by the Institute for Supply Management (ISM), which measures service industry economic activity, revealed that new orders and overall economic activity unexpectedly declined into the contraction range of the previous month. The overall manufacturing index in June dropped from 53.8 in May to 48.8 with an even larger drop in the new orders sub-index from 54.1 to 47.3.

This clear demand slowdown, if sustained for a long enough period, could result in service providers slowing their hiring rate and possibly making significant layoffs. As of June, the US service sector, which accounts for approximately 86% of the 0.1586 billion jobs in the US, is considered to be the vast majority of employment.

James Knightley, chief international economist at ING, said: "When you think of the service sector, a lot of it is consumer-driven, and the consumer is key to the US economy." "We're beginning to see more households under pressure."

US consumers are indeed under pressure and are struggling to cope with high inflation, the highest interest rate in over 20 years, depleted savings, and an increasingly heavy debt burden. Government statistics show that consumer spending, which accounts for approximately 70% of the US economy, has slowed in the past few months. Retailers themselves have also stated that they have noticed changes in consumer purchasing behavior across different income levels.

According to the ISM's survey on the food service industry, "sales and traffic are still soft compared to the previous year," attributed to "high oil prices in California and news about inflation and menu price increases." According to the latest retail data from the US Department of Commerce, consumer spending on restaurants and bars fell by 0.4% in May. One retail business said to the ISM, "With ongoing inflation, do consumers have enough discretionary income to spend?"

Knightley offered an analysis of government data showing that the top 20% of Americans spend a large proportion of their income on transportation (air travel and cruises), entertainment, food, and financial services. The lowest 60% of households spend a greater proportion on medical care services.

Scott Hamilton, Global Leader of Gallagher's Human Resources and Compensation Consulting, said that it takes time before a deceleration in demand translates into a deceleration in recruitment or layoffs because businesses must determine whether they are merely responding to a bad month or an even worse quarter.

Service providers have already been recruiting at a slower pace. According to the latest data released on Friday from the US Department of Labor, these companies added an average of 0.168 million jobs per month from April to June. This is far below the average of 0.241 million jobs per month added in the previous three months (January to March). Last year, the service sector added an average of 0.228 million jobs per month. Of course, in the service sector, which occupies a large portion of the job market, recruitment trends vary greatly.

Last month, employment in the retail industry declined for the first time since November last year. Temporary help services decreased by 0.0489 million people, dragging down a broader range of professional and business services, which decreased by 0.017 million people. Medical care has always been a major bright spot in the service sector, with employment opportunities in the medical care industry rapidly increasing in recent decades. However, even some businesses in that industry recently noticed demand weakness.

A healthcare and social assistance company said in the latest ISM survey, "Demand has slowed for our services after last month's patient count was near record highs."

As the US economy recovers from the COVID-19 pandemic, the job market experienced an astounding recovery, ultimately leading to the unemployment rate dropping to its lowest point in half a century since 2023. However, the unemployment rate has recently loosened and is currently at 4.1%, its highest level since November 2021, with an upward trend in new unemployment claims.

Federal Reserve officials are closely watching any signs of concerning weakness in the job market and are waiting for further evidence that inflation will continue to cool off without being disrupted by unexpected economic overheating.

Editor/ping